Taiyo Nippon Sanso will change
Annual Report 2013
Year Ended March 31, 2013 CONTENTS
Profi le 1
Management Philosophy 1
Business Portfolio 2
To Our Stakeholders 10
Bold Reforms and Unyielding Determination 11
Business Activities 20
Corporate Governance 22
Corporate Social Responsibility 23
Board of Directors, Corporate Auditors and Corporate Offi cers 24
Six-Year Summary 25
Management’s Analysis of Operating Results and Financial Position 26
Consolidated Financial Statements 30
Notes to Consolidated Financial Statements 35
Report of Independent Auditors 54
Investor Information 55
Disclaimer Regarding Forward-Looking Statements This annual report contains forward-looking statements regarding the future plans, strategies, activities and performance of Taiyo Nippon Sanso Corporation. Forward-looking statements refl ect management’s assump- tions and beliefs based on information available as of the date of this docu- ment’s publication and inherently involve risks and uncertainties. Actual results may thus differ substantially from these statements. Risks and uncertainties include, but are not limited to, changes in general economic and specifi c market conditions, currency exchange rate fl uctuations and evolving trends in demands for the Company’s products and services. Profile
Taiyo Nippon Sanso Corporation was created through the merger of Nippon Sanso Corporation and Taiyo Toyo Sanso Co., Ltd., on October 1, 2004. Today, the Company continues to draw on the capabilities of its two predecessors as it strives to become an Asian-born major player in the global industrial gases industry.
Management Philosophy
“Market-driven collaborative innovation: improving the future through gases”
Taiyo Nippon Sanso Corporation | Annual Report 2013 1 BUSINESS PORTFOLIO
This section presents information on Taiyo Nippon Sanso’s operations, focusing on the nature, competitive advantages and market position of each of the Company’s businesses.
Industrial Gas Business
Thermos Business Plants and Engineering Business
Research and Development
Medical Business Electronics-related Business
Lp Gas Business
2 Taiyo Nippon Sanso Corporation | Annual Report 2013 Industrial Gas Business
In line with our commitment to provide industrial gases to our customers when and where needed, we have gas production and supply capabilities in Japan, the United States and across Asia, including in China and India. This enables us to ensure safe, stable supplies of gases to customers in the manner that best suits their particular needs, thereby contributing to enhanced quality and productivity, as well as to the safety and security of their operations. Our distinctive gas technologies continue to earn us high marks from customers in a wide range of industries, including manufacturing and processing, materials, energy, chemicals, agriculture, food, bioscience and aerospace.
Competitive advantages Leading share of Japan’s market for industrial gases Number 1 in oxygen, nitrogen and argon, number 1 in helium and carbon dioxide and number 2 in acetylene, we enjoy a 40% share of Japan’s market for industrial gases. In addition to approximately 30 liquid gas production bases and 200 filling stations nationwide, we have an extensive network of shipping bases and a fleet of tanker trucks. At our liquid gas production bases, we are steadily replacing equipment with state-of-the-art, energy-efficient air separation plants.
One of only six companies in the world with rights to conduct transactions directly with major helium producers We have established an extensive customer base in North America. In the United States, subsidiary Matheson Tri-Gas, Inc., formed a helium production joint venture with Air Products and Chemicals, Inc., that is scheduled to commence operations within the current year. In China, India and elsewhere in Asia, we are pressing forward with the construction of helium filling stations with the aim of expanding our supply capabilities.
Growing network of air separation plants in the United States and Asia In the United States, we completed new air separation plants in North Dakota and Florida, the first commencing operations in May 2012 and the second in March 2013. In Asia, we completed air separation plants in southern Vietnam and on the island of Mindanao in the Philippines, which began operating in February 2012 and January 2013, respectively, and plan to complete another unit, near Pune, India, by the end of 2013.
Expanded market coverage in the United States thanks to key U.S. distributor acquisitions In fiscal year 2013, we acquired the businesses and assets of four industrial gas distributors in the United States: US Airweld, Inc. (Arizona and New Mexico), A&F Welding Supply, Inc. (Texas), Whitmer Welding Supplies, Inc. (Nebraska) and Evergreen Supply, Inc. (South Dakota).
Taiyo Nippon Sanso Corporation | Annual Report 2013 3 Plants and Engineering Business
We have built an extensive lineup of plants, which underpin our industrial gas business, that ranges from ultrahigh-purity manufacturing equipment for customers in the electronics industry to large-scale plants for steelmakers and specialized containers for the cryogenic transport of helium, and enjoy a favorable reputation for all products both in Japan and overseas. Our offerings also include space- simulation chambers, large-scale helium refrigeration systems and other cutting-edge offerings, which we market primarily for use in space development and in R&D in the area of superconductive technologies.
Competitive advantages Top share of Japan’s market for air separation plants A wealth of accumulated cryogenic and adsorption technologies, which we are leveraging to reduce consumption of electricity and cost per unit of production, as well as to increase the quality and size of plants Cutting-edge simulation technologies that ensure the optimal operation of air separation plants in response to different requirements One of only three helium container manufacturers worldwide and the only one in Japan We are expanding our production capacity to accommodate rising demand for containers that facilitate the cryogenic transport of helium over long distances.
4 Taiyo Nippon Sanso Corporation | Annual Report 2013 Electronics-related Business
Operating in an industry that is increasingly characterized by global-scale competition and cooperation, electronics manufacturers face growing pressure to ensure the efficiency and stability of production. Such firms look to us for reliable supplies of high-grade materials gases, as well as for technologies that facilitate the safe and efficient use of such gases. To provide electronics manufacturers with a wide range of materials gases, as well as with a huge volume of high-purity nitrogen gases, we install Total Gas Centers (TGCs), which facilitate stable, around-the-clock supplies. We also manufacture and sell refining and exhaust gas abatement equipment, and metal organic chemical vapor deposition (MOCVD) systems, used in the production of compound semiconductors, as well as construct piping to deliver high-purity gases.
Competitive advantages World-class total gas and equipment solutions made possible by stringent quality control and clean technologies Solutions include high-purity piping systems.
Supply structure encompassing key global markets Our supply structure covers Japan, East Asia (South Korea, China and Taiwan), Southeast Asia, and the United States. Our global network enables us to optimize production, procurement and transport.
Increasing sales of UR-26K MOCVD system This system realizes world-class surface processing performance and a yield rate of 10 six-inch or six eight-inch wafers.
Taiyo Nippon Sanso Corporation | Annual Report 2013 5 LP Gas Business
We wholesale LP gas to production facilities and for other industrial applications, and supply it to fueling stations for taxis and other vehicles, as well as to a wide range of other customers, from restaurants and other commercial users to residential users. We also sell related equipment and devices, including gas heat pumps, air conditioners, fuel cells for homes and hot water heaters, as well as design, build and provide maintenance services for LP gas dispensers and other supply facilities.
Competitive advantages Ranked ninth in Japan in terms of market share, with an annual LP gas supply capacity of 410,000 tons Ability to provide stable LP gas supplies to approximately 100,000 households that lack access to town gas services; increasingly strong and efficient network in Japan for supplying commercial users thanks to the integration and/or expansion of sales and delivery sites
6 Taiyo Nippon Sanso Corporation | Annual Report 2013 Medical Business
In addition to providing stable supplies of high-quality medical gases, we develop, manufacture, sell and provide maintenance services for gas supply systems for hospitals, as well as home oxygen therapy (HOT) and other home healthcare equipment. We also extend comprehensive support in the form of around- the-clock services, including remote monitoring of gas levels and follow-up services for equipment, which are provided in cooperation with retailers. Applying our advanced gas technologies, we provide products for the biotechnology field, including cryopreservation containers for bioresources used in research, as well as stable isotopes and specialty gases for use in advanced diagnostics and medical treatment.
Competitive advantages 200 kg increase in annual production capacity for Water-18O, a starting material for diagnostic agents used in positron emission tomography (PET) diagnostics in the fourth quarter of fiscal year 2013, bringing our total annual production capacity (combined capacities of new and existing plants) to a world-class 300 kg. A third plant (annual capacity: 300 kg) planned in Japan will double our capacity. The reliability and quality of Water-18O is highly valued by customers in more than 20 countries, including in the United States. We are working to contribute to the growing market for PET diagnostics by ensuring stable supplies of high-grade Water-18O.
Leading market position in Japan for liquid nitrogen dewars for cryopreservation, which are crucial to the biotechnology field, as well as for cell banking systems and auto-pick-up cryopreservation systems (trade name: CryoLibrary), used in cutting-edge areas such as iPS cell therapies. Japan’s largest network of production bases, filling facilities and distribution bases for medical gases, facilitating stable supplies nationwide A well-organized distribution and maintenance network that includes the Medical Technical Service Center, which helps ensure stable supplies to patients’ homes and maintain superior product quality Rising sales of OXYMED-brand medical gas supply equipment and systems for hospitals, developed through an integrated process that encompasses design, manufacturing, and testing and maintenance services
Taiyo Nippon Sanso Corporation | Annual Report 2013 7 Thermos Business
Thermos K.K., a subsidiary in Japan, is recognized as a pioneer in the stainless steel vacuum bottle industry. Leveraging its outstanding vacuum insulation and metal processing technologies, Thermos manufactures a wide range of stainless steel vacuum bottles, vacuum insulated cooking pots and other items for home and commercial use. Trusted by customers the world over, Thermos has established its own stringent quality standards and created an integrated production system that encompasses planning, development, manufacturing and sales.
Competitive advantages Products that are developed in Japan, manufactured in Malaysia and China and sold in approximately 120 countries and territories worldwide, a reputation for unconditional commitment to quality and a solid top global market share An expanded manufacturing base in China, facilitating responsiveness to growth in the market for stainless steel vacuum bottles worldwide Ultralight insulated mug (released in the fall of 2012) that swept markets worldwide thanks to its lightness, compact size and superb design and new food containers for soup and other hot liquids that are credited with creating and driving the expansion of a new market by offering a brand- new way to enjoy lunch
8 Taiyo Nippon Sanso Corporation | Annual Report 2013 Research and Development
As a pioneering provider of industrial gases with a proud history anchored by our core cryogenic air separation technologies, we work continuously to enhance our cryogenic, high-pressure, air separation, vacuum, gas control technologies, enabling us to support the activities of companies in a wide variety of industries around the world. In addition to research in advanced areas that draws on proprietary know- how accumulated over more than a century, we work to develop technologies that facilitate the application of gases in new fields. This dual approach enables us to respond promptly to evolving customer needs and to foster new demand.
Competitive advantages Tsukuba Laboratory in Ibaraki Prefecture in Japan: Promotes R&D focused on ultrahigh-sensitivity gas analysis, the synthesis of stable isotope compounds, cryogenic separation and isotope separation, as well as cutting-edge research in the electronics field Yamanashi Laboratory in Yamanashi Prefecture in Japan: Emphasizes the development of cryogenics, adsorption and other air separation-related technologies, as well as research in and the development of basic technologies in such areas as safety, physical properties and new materials Yamanashi Laboratory Gas Application Technology Center: Concentrates on research in and the development of industrial gas application technologies that respond to the needs of customers
Taiyo Nippon Sanso Corporation | Annual Report 2013 9 To Our Stakeholders
Hiroshi Taguchi, Chairman (left) Shinji Tanabe, President (right)
The global economy remained fragile in fiscal year 2013, demand, shortly after the joint venture began shipping ended March 31, 2013, despite signs of a modest recovery in products in 2011, and by our realization that market the United States powered largely by consumer spending. conditions were likely to remain unfavorable for some time. Overall weakness was due to a variety of factors, including As a consequence of our withdrawal from the joint venture, sluggish conditions in Europe, attributable to a lack of progress we posted an extraordinary loss of approximately ¥23,300 in resolving the region’s prolonged financial crisis, and hints of million in fiscal year 2013. a slowdown in key emerging economies, particularly China In light of this occurrence, a new management team was and India, after years of unprecedented growth. In Japan, installed with the aim of rebuilding our operating foundation stagnation persisted, reflecting a strong yen and deflation, but and growing our existing businesses. Nonetheless, operating ambitious measures implemented late in the period by the new conditions remained harsh throughout the period, as a government, which came into power in December 2012, and consequence of which we reported declines in consolidated the Bank of Japan, yielded indications of a gradual upturn. net sales and operating income. We acknowledge the In this environment, we saw a moderate improvement in seriousness of this situation. Placing the highest priority demand for industrial gases in North America. In Asia, the on achieving a prompt improvement in our operating results, impact of declining production in the electronics industry in we pledge to respond flexibly, swiftly and accurately Taiwan was offset by solid results in other markets and the to the dramatic changes taking place in our operating expansion of our operations in the region following the environment. In these and all of our efforts, we look forward acquisition in March 2012 of a company in Singapore. In to the ongoing support of our stakeholders. contrast, results in Japan flagged, owing to a decline in demand from our principal customers, particularly those in July 2013 the electronics industry. In September 2012 we withdrew from a monosilane gas production joint venture in Japan. This difficult decision was prompted by a sudden dramatic change in the structure of the Hiroshi Taguchi, Chairman Shinji Tanabe, President global monosilane gas market, resulting in a sharp decline in
10 Taiyo Nippon Sanso Corporation | Annual Report 2013 BOLD REFORMS AND UNYIELDING DETERMINATION
Taiyo Nippon Sanso will change
In fiscal year 2013, Taiyo Nippon Sanso reported its first-ever net loss. Having acknowledged the gravity of this situation, the companies of the Taiyo Nippon Sanso Group pledge to work together to respond flexibly, swiftly and accurately to dramatic changes in its operating environment both in Japan and overseas, thereby driving the Group forward toward new growth. Guided by its corporate philosophy—“Market-driven collaborative innovation: improving the future through gases”—the Company is taking decisive steps to reorganize its operations with the aim of ensuring sustainable growth in corporate value.
Taiyo Nippon Sanso Corporation | Annual Report 2013 11 An Interview with the President
Shinji Tanabe, President
Part I: A New Management Team Takes the Helm
“Owing to our withdrawal from a monosilane gas production joint venture, we posted an Q extraordinary loss of approximately ¥23,300 million, as a consequence of which in fiscal What are your plans and year 2013 we reported our first-ever net loss. As a result, a decision was taken to elect a goals as the new new president to provide the focus necessary to ensure our ability to respond to dramatic changes in the operating environment. I am keenly aware of the weight of president of Taiyo responsibility that comes with this position.” Nippon Sanso?
As president, I must take steps to reinforce our operating foundation and ensure it is A capable of supporting future growth. I must also implement decisive structural reforms that will enable us to cultivate new businesses that will sustain that growth. From a cost perspective, it is crucial that we realign our corporate structure and production system to better suit our current operating environment. Another key challenge will be responding to the needs of major customers in Japan who are increasingly shifting manufacturing bases offshore.
12 Taiyo Nippon Sanso Corporation | Annual Report 2013 Q “I joined Nippon Sanso Corporation—Taiyo Nippon Sanso’s predecessor—in 1972 as an engineer in the plants and engineering business, after which I spent eight years Can you tell us a little overseeing a subsidiary’s plant engineering and on-site operations in the United States. about your career up After returning to Japan, I served as managing director of the On-Site & Plant, to now? Development & Engineering and Technological Affairs divisions.”
In the United States, I was involved in procurement, which gave me some understanding A of the user side. In my experience, our focus has always been weighted heavily toward producing and supplying gases, and as a result we lack awareness of the customer’s perspective. Success depends on accurately grasping our customers’ needs and providing products and services that respond to those needs at a reasonable cost. It’s only common sense, but it is really important.
Part II: Assessment of Operating Results in Fiscal Year 2013 and Reasons for Shelving the Medium-Term Business Plan
“In Japan, on-site gas supplies to steelmakers yielded solid results. However, further Q measures to strengthen profitability are needed in the electronics-related business.” How do you evaluate your performance in A In the Electronics segment, demand from manufacturers of semiconductors, liquid Japan in fiscal year crystal display (LCD) panels and solar cells fell. In light of deteriorating market conditions, in September 2012 we withdrew from a monosilane gas production joint venture. We closed a 2013? What was your new monosilane gas production facility, which had taken three years to complete but had only strategic focus? been in operation for one year. As a consequence, we posted an extraordinary loss. We also saw a substantial decline in gas supply facility installations, notably in Japan, further underscoring the need to undertake a fundamental reorganization of our electronics-related business. In the Industrial Gas segment, our core on-site gas business benefited from firm demand from steelmakers, which are its main customers. Demand from customers in the chemicals industry, the principal users of these products, was down slightly for oxygen and nitrogen. In the Energy segment, import prices to Japan for LP gas continued to rise, but we were successful in revising sales prices accordingly. As a result, both sales and operating income were solid. In our fourth segment, called Other, the launch of new products contributed to sturdy sales in the Thermos business, which specializes in stainless steel vacuum bottles. In the medical business, we saw brisk sales of medical care equipment.
Taiyo Nippon Sanso Corporation | Annual Report 2013 13 An Interview with the President BOLD REFORMS AND UNYIELDING DETERMINATION
“In the United States, sales in the industrial gas business were steady, reflecting a Q gradual improvement in market conditions. In other Asian markets, sales in the What were results like electronics-related business were sluggish, just as they were in Japan, although overseas, particularly in sales in the industrial gas business were firm.” the United States and elsewhere in Asia? In the United States, sales in the industrial gas business were steady, bolstered by signs A of market recovery. Sales in the electronics-related business were sluggish as demand flagged, as a result of which sales in remaining businesses were insufficient to offset the absence of contributions from our U.S. safe delivery source (SDS) business—part of our specialty gases business—which was transferred to a third party in fiscal year 2012. Sales were firm in other Asian markets, bolstered by the consolidation of Singapore-based Leeden Limited, acquired in March 2012. During the period, we sought to capitalize on Leeden’s market presence to further expand our operations in Southeast Asia. To grow our existing industrial gas operations and increase our leading market shares in the Philippines and Vietnam, we commenced the expansion of our air separation plants near Hanoi in northern Vietnam and on the Philippine island of Luzon, in an industrial development on the site of the former Clark Air Base. Also in the Philippines, in January 2013 we commenced operations at our first liquid gas plant on the island of Mindanao. In China, we proceeded with efforts to boost operating rates at existing air separation plants.
“In response to dramatic changes in our operating environment, we recognize that we Q must rally our collective capabilities to reinforce our operating foundation, principally by What prompted you to rebuilding our operations in Japan and promoting further global expansion, to restore shelve your previous our growth trajectory.” medium-term business plan in October 2012? We launched our previous business plan, dubbed GEAR UP 10, in April 2011. The plan A contained three medium-term quantitative targets for critical management benchmarks— a 10% share of the global industrial gases market, an operating margin of 10% and a return on capital employed (ROCE) of 10%—and set forth strategies for reinforcing our operating foundation and driving growth. However, with the deterioration of economic conditions in Japan, exacerbated by yen appreciation, rising electricity rates and emerging risks in China, customers in major end-user industries such as electronics, steel and chemicals were compelled to revamp their operations and realign their business portfolios. Realizing that survival and prosperity in such an environment depends on being able to respond flexibly and swiftly to change, we made the decision to shelve GEAR UP 10 and narrow our focus to two basic strategies, which are to further enhance our pivotal operating foundation in Japan and to expand operations in overseas markets, which we see as being especially promising. When we announced this decision last October, we identified four key challenges and a fundamental short-term goal of increasing profit by ¥5 billion.
14 Taiyo Nippon Sanso Corporation | Annual Report 2013 Part III: Key Challenges and Basic Strategies Q “The impetus for the structural reforms we have made was our need to streamline our organization, increase efficiency, reduce costs and enhance our responsiveness to Please explain the customers to better suit our current operating environment.” rationale behind the structural reforms you A In April 2013, we reorganized our Industrial Gases and Electronics divisions. have already In the industrial gas business, cost management for production and distribution has implemented in Japan, traditionally been the responsibility of the Business Administration division. To centralize cost management at all stages, from production through to sales, we created a product planning particularly in the and management department within the Industrial Gases division. We also established a industrial gas and marketing department, which is tasked with devising and implementing strategies for our global electronics-related industrial gas business. We are confident that these changes will facilitate the creation of a new businesses? business model, as well as the geographic expansion of our operations. In the electronics-related business, we responded to the rapid contraction of the Japanese market by streamlining individual sections within the Electronics division, as well as the division’s staff. Personnel were reassigned to positions closer to the front line of sales to improve our responsiveness to customer needs. To accelerate the expansion of our overseas operations, notably in Asia, we established a new global business department. The department will work closely with U.S. subsidiary Matheson Tri-Gas, Inc., to direct planning and sales in global markets. In light of the steady decline in gas supply facility installations in the electronics- related business in Japan, we have also embarked on an extensive reorganization of an engineering subsidiary. Transforming the company into an appropriately lean and efficient entity will require personnel reductions.
“We will expand our operations in overseas markets, which offer considerable growth Q potential. Our goal is to boost overseas sales outside of Japan to 50% of net sales, from Can you tell us about 30% at present.” your plans for expanding overseas businesses, A Having acknowledged the unlikelihood of significant growth in the Japanese industrial including those for gas market, we see North America and the rest of Asia offering greater potential for our industrial gas business. boosting the earnings In North America, for example, we have capacity of your North capitalized actively on a variety of small- and American business? large-scale M&A opportunities, as a result of which our sales of industrial gases in that market have tripled over the past decade. In contrast, increasingly intense competition has depressed margins in the electronics-related business. For these reasons, our focus in North America will be on implementing stringent rationalization measures to shore up profitability, purchasing small and mid-sized gas distributors
Taiyo Nippon Sanso Corporation | Annual Report 2013 15 An Interview with the President BOLD REFORMS AND UNYIELDING DETERMINATION
Milestones in the United States (2000–2014)
2002 Builds air separation plant in Irving, Texas 2004 Acquires six air separation plants from the Air Liquide Group 2006 Acquires helium business of the former BOC Group plc and Linweld Inc. 2007 Builds air separation plant in Vernon, California; acquires Polar Cryogenics Inc. 2008 Acquires Aeris, Inc., Five Star Gas & Gear, Inc. and Advanced Gas Technologies 2009 Builds air separation plants in San Antonio, Texas and Grimes, Iowa 2009 Acquires ETOX, Inc. and Valley National Gases, Inc. 2010 Acquires Western International Gas & Cylinders Inc. 2011 Acquires Quimby Welding Supplies, Inc. 2012 Acquires US Airweld, Inc., A&F Welding Supply, Inc., Whitmer Welding Supplies, Inc. and Evergreen Supply, Inc. 2013 Builds air separation plants in Dickinson, North Dakota and Lakeland, Florida 2014 Builds air separation plant in Mesa, Arizona (under construction)
Since 2000, we have expanded our presence in the United States through an active program of acquisitions. As a result, we currently have 270 bases in 41 states.
and proceeding with the expansion of our air separation plants in the region. In 2012, we acquired four North American gas distributors. These included Evergreen Supply, Inc., which we acquired in December, giving us a service base in South Dakota, thereby positioning us well to benefit from demand growth in the state fueled by the shale gas revolution. We also completed construction of two new air separation plants, one each in Dickinson, North Dakota, and Lakeland, Florida, and are in the process of building a third in Mesa, Arizona. Going forward, the rapid expansion of shale gas and oil production in North America is expected to boost regional demand for nitrogen and other industrial gases. We will seek to capture that demand by expanding our network of liquid gas bases. Our efforts to extend our on-site hydrogen plant business are also progressing well. In Asia, we further fortified our already-high market share by increasing our stake in a joint venture in Vietnam. In Singapore, the Philippines and other markets where we have built a strong market presence, we will work to foster additional growth. In recent years, our annual sales of industrial gases in Asia have been in the area of ¥40,000 million. Our medium-term goal is to lift that to ¥100,000 million. We will also actively expand into new markets, including Indonesia.
Q “This is a task we will address through unremitting efforts to reduce costs and to enhance quality and performance.” How will you strengthen responsiveness in the A We will standardize plant designs and automate processes such as welding to shorten plants and engineering lead times and cut costs. Additionally, we will consign the fabrication of cold boxes and business? other plant components to manufacturers overseas. In North America and Southeast Asia, we will strive to take advantage of increasing demand for new plants and increase our share of each individual market. In Japan, our emphasis will be on building highly efficient small and mid-sized air separation plants to fill gaps in our production network, thereby lower distribution costs and bolster our market share.
16 Taiyo Nippon Sanso Corporation | Annual Report 2013 “Between now and fiscal year 2017, the companies of the Taiyo Nippon Sanso Group will Q work together to cultivate new demand that will add ¥20,000 million to annual net sales.” Earlier you spoke about cultivating new A Hydrogen filling stations will be of particular importance. In Japan, the Ministry of Economy, businesses that will help Trade and Industry is supporting a project to establish a nationwide hydrogen filling station sustain growth. What infrastructure, as part of which it intends to build 100 hydrogen filling stations across the country by 2015, when fuel cell vehicles (FCVs) are expected to become available to the general public. sorts of businesses are Leveraging our proprietary compact facility engineering capabilities, we have developed a you considering? packaged off-site hydrogen station that can be built for approximately half the cost of a conventional station. Thanks to our technologies, we have set a goal of establishing a dominant position in this new sector in Japan and securing orders for 30 of the 100 planned stations. We also have high expectations for our cryopreservation system, which facilitates the automated freezing, storage and thawing of induced pluripotent stem (iPS) cells. Significant demand for the system is expected from universities, research facilities and pharmaceutical manufacturers. We are also promoting the development of a new refrigeration system for high- temperature superconductors that uses liquid nitrogen as a refrigerant instead of liquid helium. Hydrogen filling station Other key development areas include carbon nanotubes and other innovative materials and new specialty electronics materials gases.
Q “In October 2012, we set a target for a ¥5 billion increase in profit, which we aim to achieve within two years.” What specific strategies have you formulated to A To achieve this target, we have further broken down our four key challenges into five add ¥5 billion to profit? concrete efforts. The first is to revise sales prices of our industrial gases in Japan. In fiscal year 2013, rate hikes by Tokyo Electric Power Company, Incorporated (TEPCO) drove up production costs. Owing to delays in negotiating price increases for liquid gases sold to customers in TEPCO’s service area, the actual positive impact of gas price increases fell short of our expectations. Accordingly, we are determined to make up the difference in fiscal year 2014. We have already taken prompt steps to revise sales prices to customers in areas other than those served by TEPCO, where electricity rate hikes are expected in fiscal 2014. The second is to fortify collaboration with our official dealers, stepping up cooperation between our salespeople and official dealers to cultivate new markets and raising the profile of our products at official dealers’ retail locations. Through such efforts, we will endeavor to raise annual sales via official dealers, currently approximately ¥80,000 million, by 10%. Third, we will improve the profit structure of our electronics-related business. In light of the decline in gas supply facility installations in Japan, we will focus on rightsizing our engineering operations and modifying the functions of our Electronics Division with the aim of increasing operating efficiency and reduce costs. Fourth, we will also improve the profit structure of our North American operations. This is a task we have sought to address since 2011 through rationalization and other measures. As part of this effort, we have created a new organization that centers on four regional divisions, rather than six. We also merged several previously acquired local subsidiaries. Additionally, we have transferred back-office departments, including those of subsidiary Matheson Tri-Gas, to our newly
Taiyo Nippon Sanso Corporation | Annual Report 2013 17 An Interview with the President BOLD REFORMS AND UNYIELDING DETERMINATION
established a Back-office Center in Dallas, Texas. These moves have enhanced efficiency, which has in turn enabled us to strengthen our sales capabilities and trim support staff. Fifth, we will expand our operations in Asia. We have already taken several steps to this end, transforming our joint venture in Vietnam into a consolidated subsidiary, while subsidiary National Oxygen Pte. Ltd., in Singapore, has launched sales of standard gases in Saudi Arabia.
Efforts to Strengthen Sales Capabilities and Enhance Efficiency in the U.S.
Realignment Accomplished • U.S. industrial gas operations reorganized into four regional Operating structure of U.S. industrial gases business divisions, each responsible for packaged gases and bulk gases, down from six • Integration of acquired businesses and rationalization of back-office departments completed
West North Zone East Zone Zone
North Central North East West Zone Zone South Zone Midwest Back-office Center Zone Zone South Zone South East Zone
Part IV: Management’s Perceptions of the Current Operating Environment
“In Japan, stimulus policies introduced by the new government, which took power last Q year, and the Bank of Japan have sparked a turnaround in the domestic economy.” What positive trends do you see in your main A For the past several years, manufacturers in Japan have operated in a harsh geographic markets that environment, owing to the relentless strength of the yen, electricity rate hikes and other you expect to bolster factors. As a consequence, many manufacturers have shifted production offshore and closed down or integrated domestic production facilities. Companies were forced to form alliances as operating results in almost a last resort. Since the new government took power last year, stimulus policies fiscal year 2014? What introduced by the new government and the Bank of Japan have sparked a turnaround in the risks do you anticipate? domestic economy. The steel industry, one of our principal customer industries in Japan, continues to see robust demand for exports to automakers and to maintain high operating rates. Efforts to reduce costs, including through the use of low-grade coal, have pushed up demand for oxygen. However, excess capacity in China’s steel industry is likely to persist, which is certainly a cause for some concern. In the chemical industry in Japan, the yen correction continues to support a recovery in production of general-purpose ethylene derivatives, particularly for export. Nonetheless, in light of ongoing structural issues, notably the high cost of raw materials, one can only assume that chemical companies will start looking to shift production offshore. Over the medium to long term, we will position ourselves to support customers in this industry in overseas markets.
18 Taiyo Nippon Sanso Corporation | Annual Report 2013 Plunging demand from the Japanese electronics industry has had a particularly harsh impact on our performance in recent years. Demand does appear to have finally bottomed out, but the likelihood of a return to anything near peak level is extremely low. Accordingly, our focus will remain on rationalization and streamlining our operations. In the United States, conditions remain harsh, owing to steadily declining demand for electronics-related gases. Having concluded efforts to build a leaner organization, including through the integration and closure of specialty gases production facilities, in fiscal year 2013, and given the promising outlook for shale gas development in North America, we are guardedly optimistic. However, with a glut of plants slated for construction by chemicals manufacturers looking to take advantage of the shale gas revolution, we see this primarily as an opportunity for our on-site gas business, and will take ambitious steps to use this opportunity to our advantage. In Asia, we will continue to invest actively in promising markets, notably in Southeast Asia, focusing on areas where we have already established a strong presence, including the Philippines and Vietnam, to enhance our supply capabilities. This will situate us to capitalize on market growth going forward. We will also actively expand into new markets, including Indonesia.
Part V: Outlook for Fiscal Year 2014
Q “Our forecasts include a ¥6.6 billion increase in operating income.” Can you explain the A We currently expect consolidated net sales in fiscal year 2014 to be up 9.7% from fiscal assumptions underlying year 2013. If we disregard the impact of favorable currency rates and an increase in the your operating results scope of consolidation, the increase would be 7.0%. This reflects our outlook for a gradual forecasts for fiscal year recovery in the industrial gas business in Japan, although we expect sales in the electronics- 2014? related business to be level. In North America, we expect to see brisk growth in our cylinder business, the recovery of which had been delayed. We predict firm results in the industrial gas business elsewhere in Asia. We also forecast consolidated operating income to rise 26.6%, or ¥6.6 billion, owing to the positive impact of higher net sales and the other aforementioned factors.
Q “I remain unyielding in my determination to increase corporate value.” In closing, is there A The entire Taiyo Nippon Sanso Group is committed to working as one to rebuild our anything that you would operating foundation as swiftly as possible and to secure sustainable growth. My like to say directly to personal motto has always been “Never give up.” As president, I will to continue to lead to the shareholders? absolute best of my ability and will be unyielding in my determination to increase corporate value. In all of our efforts, I look forward to the ongoing support and guidance of shareholders and investors.
Taiyo Nippon Sanso Corporation | Annual Report 2013 19 Business Activities
Perception of the Business Climate in Key Markets
Japan
Owing to the launch of a decisive fiscal stimulus package by Total Sales and Operating Income in Japan Years ended March 31 (Millions of yen) Japan’s new government, which came to power in December CAGR Total sales 6.8% 500,000 Operating income 8.9% 35,000 2012, the yen finally began to weaken toward the end of fiscal 400,000 28,000 year 2013. Nonetheless, with the Japanese currency robust 300,000 21,000 through most of the period, the manufacturing sector stagnated. 200,000 14,000 While demand from steel manufacturing, our largest customer 100,000 7,000 industry, was firm, and automotive production remained high, 0 0 the strength of the yen discouraged demand from other major 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (Estimate) customer industries, including chemicals, nonferrous metals Total sales Operating income Note: Compound annual growth is calculated based on actual total sales and operating and shipbuilding. Demand from the electronics industry was hit income figures for the years ended March 31, 2004—2013 and estimates for the year ending March 31, 2014. particularly hard, reflecting visible declines in operating rates and efforts to curb capital expenditures.
20 Taiyo Nippon Sanso Corporation | Annual Report 2013 North America Total Sales and Operating Income in North America Modest economic recovery continued in North America, stimulated Years ended March 31 (Millions of yen) CAGR Total sales 12.2% by another round of quantitative easing in the United States and 120,000 Operating income 7.5% 12,000
9,600 supported by falling unemployment rates and increased consumer 90,000 spending. Sales of packaged gases rose, but not enough to offset 7,200 60,000 the impact of waning sales to the electronics industry. With the aim 4,800 30,000 of securing solid growth in North America, we acquired four smaller 2,400
0 0 U.S. industrial gas distributors and proceeded with the construction 20042005 2006 2007 2008 2009 2010 2011 2012 2013 2014 (Estimate) of three new air separation plants. Concurrently, we sought to Total sales Operating income Note: Compound annual growth is calculated based on actual total sales and operating reinforce our earnings foundation by realigning our North American income figures for the years ended March 31, 2004—2013 and estimates for the year ending March 31, 2014. business portfolio and streamlining our labor force.
Total Sales and Operating Income in Asia Asia Years ended March 31 (Millions of yen) CAGR Total sales 16.0% 50,000 Operating income 9.6% 3,000 Economic growth in Asia slowed, a consequence of falling exports to 40,000 2,400 Europe, but remained firm. During the period, we pressed ahead with 30,000 1,800 ambitious efforts to expand our presence in China, Taiwan, South 20,000 1,200 Korea, Singapore, Vietnam, the Philippines, Thailand and Malaysia. 10,000 600 We proceeded with the construction of two new air separation 0 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 plants, one each in the Philippines and Vietnam, where we already (Estimate) Total sales Operating income enjoy a leading market share in terms of liquid gas production Note: Compound annual growth is calculated based on actual total sales and operating income figures for the years ended March 31, 2004—2013 and estimates for the year capacity. We also continued working to expand our market coverage. ending March 31, 2014.
Taiyo Nippon Sanso Corporation | Annual Report 2013 21 Corporate Governance
Basic Policy Auditing Structure and Internal Control System
To earn the trust and respond to the expectations of our many To ensure adequate monitoring capabilities, our Board of stakeholders, including our shareholders, customers, local Auditors consists of four auditors, three of whom satisfy the communities and employees of Taiyo Nippon Sanso Group requirements of outside auditors, including two who are companies, we work continuously to create a management independent. Auditors communicate with the independent system that ensures transparency and efficiency, as well as accountants, with whom they meet to exchange opinions on the effectiveness of business execution. key aspects of the auditing process and the assessment of risks associated with auditing from the perspective of internal controls. They are briefed on audit plans and audit results by Management Structure the Internal Control Committee (an internal auditing body), as Taiyo Nippon Sanso has adopted a system of internal well as by the Technical Audit Office on annual safety plans auditors. Our Board of Directors is composed of 15 directors. and their implementation, and oversee management To guarantee transparency, one of the directors satisfies the appropriateness and efficiency. requirements for an outside director. To clarify accountability
on a fiscal year basis, the term of office for directors is set at one year. In fiscal year 2013, the Board of Directors met 12 Remuneration for Directors times. The outside director, Shotaro Yoshimura, attended all In fiscal year 2013, remuneration for 19 directors totaled ¥629 10 of the meetings held subsequent to his appointment million, while that for six auditors totaled ¥105 million. (100.0%). Remuneration for directors consists of monthly remuneration, performance-linked bonuses and dividend-linked bonuses. Performance-linked bonuses are tied to consolidated operating results.
Auditing and Risk Management Structure General Meeting of Shareholders
Appointment/dismissal Appointment/dismissal Appointment/dismissal Coordination Independent auditors Board of Directors Board of Auditors
Appointment / Coordination Monitoring of auditors’ performance of their auditing duties (operational/accounts ) dismissal Independent audit of accounts
Representative Director Management Committee Internal Control Committee Compliance Taskforce Risk Assessment Taskforce Technological Risk Management Taskforce Corporate Audit Office Coordination Internal audit Divisions and Group companies
22 Taiyo Nippon Sanso Corporation | Annual Report 2013 Corporate Social Responsibility
We recognize effective corporate social responsibility (CSR) as a crucial aspect of management. Through our CSR program, which emphasizes contributing to society and to environmental preservation, among others, we strive for sound management, thereby ensuring Taiyo Nippon Sanso remains an entity that exists in harmony with society and the natural environment and is deserving of the designation “good corporate citizen,” as well as helping to realize sustainable growth. Our CSR program is founded on the core concept behind our corporate philosophy, “Market- driven collaborative innovation: improving the future through gases,” namely, our commitment to working with our customers in different industries to contribute, through the advancement of gas technologies, to a healthy and prosperous society.
To fulfill the responsibilities and effectively manage the to reduce their working hours can adjust their starting and/or technical risks implied in our corporate slogan, “The Gas finishing times in either direction in 30-minute increments. We Professionals,” and in line with our belief that selling gas is also offer a special leave system that enables employees to commensurate with selling safety and peace of mind, we use expired annual vacation days to care for children of continue to expand our operations in a manner that reflects elementary school age or younger, undergo treatment for non- five key priorities: work-related illness or injuries requiring more than three days,
1. Ensure stringent compliance provide nursing care for another family member or receive prenatal care. Recognizing that the rapid aging of society will 2. Enhance safety management mean employees are increasingly required to provide nursing 3. Guarantee superior product quality care for elderly family members, we have also established a 4. Contribute to a healthy environment nursing care leave system that enables employees to take up 5. Make effective use of intellectual property to 365 days off for this purpose.
Looking ahead, we will continue to develop innovative Creating a Positive Work Environment working arrangements that respond flexibly to the needs
We view our employees as our most important asset. To resulting from Japan’s changing population dynamics. maximize this asset, which is also our biggest competitive Through such efforts, we will endeavor to create a positive advantage, we strive to create a positive work environment work environment for all employees. that enables all employees to realize their full potential. To this end, we have developed a variety of employee leave systems that accommodate a diverse range of individual needs.
One of the principal challenges facing Japan today is demographic change, a consequence of falling birth rates and the increasing proportion of the population accounted for by seniors. As part of our effort to support employees rearing children, we have developed a child-care leave system that enables employees to shorten their working day by choosing either reduced working hours or flextime. Employees opting
Taiyo Nippon Sanso Corporation | Annual Report 2013 23 Board of Directors, Corporate Auditors and Corporate Officers
Board of Directors Corporate Auditors Corporate Officers Masahiro Sakamoto Chairman and Kiyoshi Fujita Masahiko Kitabatake Representative Director Yasufumi Miyazaki*2 Hiroyuki Tanizawa Hiroshi Taguchi Ichiro Yumoto*2 Tadashi Higashino Kazuo Yoshida*2 Atsuhiro Fujita President and Hiroshi Nagae Representative Director Takeki Hata Shinji Tanabe Corporate Officers Norikazu Ishikawa Masayuki Taniguchi Vice President and Executive Corporate Masami Takaine Representative Director Officers Kazunori Takeda Kunishi Hazama Tetsuya Nakayama Shigeyuki Osawa Yuki Hajikano Hirohisa Yanagida Vice Presidents Jun Ishikawa Kou Matsumoto Tadashige Maruyama Masami Sakaguchi Masahisa Kanzaki Yujiro Ichihara Yoshihide Kenmochi Haruhiko Yasuga Shigenobu Somaya Masahiro Uehara Senior Managing Directors Mikio Yamaguchi Kenji Nagata Yoshikazu Yamano Kazushige Arai Kunihiro Kobayashi Shigeru Amada William J. Kroll (As of June 27, 2013)
Managing Directors Hiroshi Katsumata Kinji Mizunoe Akihiko Umekawa Shin-ichiro Hiramine Keiki Ariga
Executive Directors Yasunobu Kawaguchi Shotaro Yoshimura*1
Notes: *1 Outside Director Notes: *2 Outside Corporate Auditor
24 Taiyo Nippon Sanso Corporation | Annual Report 2013 Six-Year Summary
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries
Millions of yen Years ended March 31 2013 2012 2011 2010 2009 2008 Net sales ¥468,387 ¥477,451 ¥483,620 ¥433,390 ¥495,746 ¥507,718 Operating income 24,884 31,067 35,468 27,556 29,164 38,783 Net income (loss) (2,071) 21,200 12,736 15,748 16,533 21,930 Selling, general and administrative expenses/ Net sales (%) 26.8% 26.3% 26.1% 27.5% 24.7% 23.1% Return on equity (%) (1.0)% 10.8% 6.5% 8.3% 8.6% 10.8% Return on assets (%) (0.3)% 3.5% 2.1% 2.4% 3.1% 4.0% Capital expenditures 31,715 31,452 31,991 38,366 66,010 36,260 Depreciation and amortization 29,400 30,471 32,167 30,143 28,339 25,506 Research and development expenses 3,177 3,458 3,924 4,137 3,936 2,903 Interest-bearing debt 253,424 241,121 250,409 259,111 191,074 159,500 Total net assets 224,253 219,611 207,416 212,396 194,250 217,813 Total assets 615,820 607,024 617,676 617,215 534,350 547,237
Yen Per share data: Net income (loss)1 ¥ (5.25) ¥53.33 ¥31.86 ¥39.39 ¥41.21 ¥54.48 Cash dividends 12.00 12.00 12.00 12.00 12.00 12.00
Times Price earnings ratio — 10.95 21.75 23.20 15.55 14.65
1 Net income per share is computed based on the weighted average number of shares of common stock outstanding during each year, as adjusted retroactively for free share distributions made during the period.
Taiyo Nippon Sanso Corporation | Annual Report 2013 25 Management’s Analysis of Operating Results and Financial Position
Scope of Consolidation and Application of the Equity Method
As of March 31, 2013, Taiyo Nippon Sanso Corporation had A total of 86 consolidated subsidiaries and 19 equity- 110 consolidated subsidiaries (46 based in Japan and 64 method affiliates are accounted for in the Industrial Gas based overseas) and 30 equity-method affiliates (10 based segment. The Electronics segment and the Energy segment in Japan and 20 based overseas). comprise 12 and four consolidated subsidiaries, respectively. The Other segment encompasses eight consolidated subsid- iaries and 11 equity-method affiliates.
Operating Results
In fiscal year 2013, ended March 31, 2013, consolidated on equity (ROE) was -1.0%, down from 10.8% in fiscal year net sales declined 1.9%, to ¥468,387 million. Cost of sales 2012. At the general meeting of the Company’s shareholders slipped 0.9%, to ¥317,999 million. Selling, general and admin- on June 27, 2013, a proposal to pay a year-end dividend istrative expenses edged down ¥22 million, to ¥125,503 mil- of ¥6.00 per share was approved by shareholders, bringing lion. Reflecting these and other factors, operating income fell cash dividends for the term, comprising interim and year-end 19.9%, to ¥24,884 million. The operating margin decreased dividends, to ¥12.00 per share. 1.2 percentage points, to 5.3%. Capital expenditures, including the cost of construction, Owing to our withdrawal from a monosilane gas produc- totaled ¥31,715 million, an increase of ¥263 million from the tion joint venture, we posted an extraordinary loss of ¥23,276 previous fiscal year. In contrast, depreciation and amortization million. As a consequence, we reported a net loss of ¥2,071 declined ¥1,071 million, to ¥29,400 million. Research and million, compared with net income of ¥21,200 million in the development costs, which totaled ¥3,177 million, were down previous fiscal year. Net loss per share was ¥5.25, while return ¥281 million, equivalent to approximately 0.7% of net sales.
Net Sales Operating Income Net Income (Loss)
(Billions of yen) (%) (Billions of yen) (%) (Billions of yen) (Yen)
500 30 40 40 24 60
400 24 30 30 18 45
300 18 20 20 12 30
200 12 10 10 6 15
100 6 0 0 0 0
0 0 –10 –6 –15 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Industrial gas Industrial gas Net income per share (right scale) Electronics Electronics Energy Energy Other Other Overseas sales as a percentage of Overseas operating income as a total (right scale) percentage of total (right scale)
26 Taiyo Nippon Sanso Corporation | Annual Report 2013 Results by Segment
Industrial Gas Energy Sales of oxygen rose in Japan, shored up by firm demand Despite a decline in the volume of LP gas shipments, we from steelmakers, the principal users of these gases. continued to focus on efforts to revise sales prices in line However, sales of nitrogen edged down, owing primarily to with higher import prices and reduce costs, among others. lower operating rates in the chemicals industry. Sales of air As a consequence, sales in this segment advanced 3.0%, separation plants were down from fiscal year 2012, as were to ¥40,031 million, and operating income increased 8.4%, sales of cutting and welding equipment, owing primarily to to ¥1,808 million. the strong yen. Sales in North America increased, against a backdrop of gradual economic recovery. In Asia, sales Other climbed substantially, bolstered by an increase in the scope In the medical business, shipments of medical devices of consolidation. Owing to these and other factors, sales in and equipment were brisk. Sales in the Thermos business the Industrial Gas segment rose 2.4%, to ¥298,073 million. advanced, thanks to contributions from sales of ultralight Nonetheless, operating income slipped 1.8%, to ¥21,322 compact insulated mugs and food containers. As a result, million, owing to an increase in costs attributable to higher sales in the Other segment rose 4.7%, to ¥33,736 million, electricity rates and other charges. and operating income climbed 20.9%, to ¥3,291 million.
Electronics Sales to the electronics industry were weak, reflecting sluggish demand for semiconductors, liquid crystal display (LCD) pan- els, solar cells and other products. Sales of electronics materi- als gases and electronics-related equipment and installations fell sharply. Sluggish capital investment by key domestic customers pushed down sales of MOCVD systems, used in the fabrication of semiconductors. As a result, the Electronics segment reported a 16.3% drop in sales, to ¥96,546 million, and an operating loss of ¥536 million.
Financial Position
As of March 31, 2013, total assets amounted to ¥615,820 Property, plant and equipment, less accumulated depreci- million. Approximately ¥29,300 million of this was attributable ation, rose 6.5%, to ¥272,142 million, bolstered mainly by to the declining value of the yen, which was ¥8.84 lower increases in gas supply facilities and transport equipment. against the U.S. dollar on March 31, 2013, than on the same Total investments and other assets rose 6.0%, to ¥140,301 day a year earlier. The current ratio was 115%, down 14.0 million, due largely to an increase in investment securities. percentage points from the end of fiscal year 2012.
Taiyo Nippon Sanso Corporation | Annual Report 2013 27 Total current liabilities, at ¥176,242 million, were up 3.8%, Total net assets rose 2.1%, to ¥224,253 million. This owing primarily to an increase in short-term loans payable. increase occurred despite the adverse impact of the net loss Total noncurrent liabilities declined 1.1%, to ¥215,324 million. on retained earnings, which fell ¥6,836 million, and reflected Total interest-bearing debt thus amounted to ¥253,424 million, such factors as a ¥13,015 million decrease in the deduction an increase of ¥12,303 million. for foreign currency translation adjustments. As a conse- quence, the equity ratio was 33.1%, essentially level with fiscal year 2012, while net assets per share rose ¥19.36, to ¥525.38.
Cash Flows
Net cash provided by operating activities in fiscal year 2013 Net cash used in financing activities, at ¥8,181 million, amounted to ¥33,964 million, a decline of ¥12,022 million was down ¥15,355 million. Principal applications of cash from fiscal year 2012. Principal factors behind this result included cash dividends paid and the purchase of treasury included a loss before income taxes and minority interests and stock. changes in depreciation and amortization, notes and accounts After factoring in the effect of exchange rate fluctuations, receivable–trade and notes and accounts payable–trade. The operating, investing and financing activities in fiscal year 2013 interest coverage ratio weakened by 2.5 points, to 8.2 times. yielded cash and cash equivalents at end of period of ¥22,721 Net cash used in investing activities came to ¥37,225 million, down ¥10,554 million from the end of fiscal year 2012. million, up ¥4,477 million. This was primarily attributable to purchases of property, plant and equipment.
Total Assets Equity Return on Equity (ROE) and Return on Assets (ROA) (Billions of yen) (Billions of yen) (%) (%)
750 250 40 12
600 200 32 9
450 150 24 6
300 100 16 3
150 50 8 0
0 0 0 –3 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 2009 2010 2011 2012 2013 Equity ratio (right scale) ROE ROA
28 Taiyo Nippon Sanso Corporation | Annual Report 2013 Business Risks
Management Policies, Business-related Risks Product Defects Purchase of Property, Plant and Equipment The Company sells high-pressure gas-related products and The Company maintains large-scale gas supply facilities for handles toxic and flammable gases used in electronics manu- major customers and needs to spend heavily to maintain and facturing (semiconductors, LCD panels, solar cells). While the upgrade these facilities. Accordingly, interest rate trends could Company strives to ensure the effective management of have a material impact on the Company’s business related risks, it cannot guarantee that all of its products are performance. free of defects.
Reliance on Specific Industries Financial Risks and Other Factors The Company supplies gases to a wide range of industries Foreign Exchange Risk and its exposure to risks from reliance on specific industries is The Company exports products for sale outside of Japan. The thus low. Nevertheless, changes in the crucial semiconductor Company strives to hedge foreign exchange risks by entering market could have a significant impact on the Company’s into forward exchange contracts and other derivatives trans- business performance. actions. However, the Company may not be able to respond to sudden fluctuations in currency rates, which therefore may Manufacturing Costs have an adverse impact on its business performance. Electricity is the major component of the cost of manufactur- ing such core products as oxygen, nitrogen and argon. Retirement Benefit Liabilities Accordingly, a sharp increase in the price of crude oil could A sudden deterioration in retirement plan returns resulting in result in a substantial increase in electricity charges, which the an increase in retirement benefit costs may have an adverse Company may be unable to reflect in the pricing of its impact on the Company’s business performance. products. Natural Disasters Overseas Factors The occurrence of earthquakes or other natural disasters in The Company maintains operations overseas, particularly in areas where the Company has manufacturing facilities may the United States and in other parts of Asia, including China, damage facilities. In particular, damage to the Company’s where the Company has substantial gas operations. Political large-scale manufacturing facilities may lead to a significant and economic changes in countries where the Company has decline in production capacity and incur major recovery costs. operations may have an adverse impact on its business Such factors may adversely affect the Company’s business performance. performance.
Technological and Safety Factors Legal Issues Technological Development Unanticipated changes to existing laws and the introduction The creation of new products and technologies entails various of new laws—particularly in countries overseas where the uncertainties, owing to the Company’s reliance on technologi- Company maintains operations—may adversely affect the cal development in such areas as compound semiconductors, Company’s business performance. Revisions to environmental the environment and energy. laws that result in a tightening of restrictions may result in an increase in costs to ensure compliance, which may also Intellectual Property adversely affect the Company’s business performance. The Company’s business depends on proprietary technologi- Because the Company does business both in Japan and cal development. The Company endeavors to obtain intellec- overseas, there is a risk that it may become involved in legal tual property rights as necessary for its proprietary disputes or be the subject of investigations and/or legal action technologies. However, there are no guarantees that its by relevant authorities in the markets in which it operates. technologies are completely protected. Such legal and regulatory action may adversely affect the Company’s operations, business performance, financial condition, reputation and reliability.
Taiyo Nippon Sanso Corporation | Annual Report 2013 29 Consolidated Balance Sheets
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries
Thousands of U.S. dollars Millions of yen (Note 4) March 31 2013 2012 2013 Assets Current assets: Cash and deposits (Notes 15 and 24) ¥ 24,743 ¥ 34,596 $ 263,083 Notes and accounts receivable—trade (Notes 6 and 15) 123,282 132,176 1,310,813 Merchandise and finished goods 22,716 23,462 241,531 Work in process 7,100 7,827 75,492 Raw materials and supplies 8,092 6,439 86,039 Deferred tax assets (Note 10) 7,285 5,216 77,459 Other 11,007 10,332 117,033 Allowance for doubtful accounts (850) (842) (9,038) Total current assets 203,376 219,208 2,162,424
Property, plant and equipment (Notes 8, 9,12 and 23) 698,083 653,202 7,422,467 Accumulated depreciation (425,941) (397,703) (4,528,878) Property, plant and equipment, net 272,142 255,499 2,893,589
Investments and other assets: Investment securities (Notes 5 and 15) 60,110 50,871 639,128 Long-term loans receivable 642 5,103 6,826 Goodwill 43,561 39,735 463,169 Other intangible assets 17,213 16,376 183,020 Prepaid pension cost (Note 13) 9,804 10,790 104,242 Deferred tax assets (Note 10) 2,057 2,105 21,871 Other 8,532 9,089 90,718 Valuation allowance for investments (1,000) (865) (10,633) Allowance for doubtful accounts (618) (889) (6,571) Total investments and other assets 140,301 132,316 1,491,770 Total assets ¥ 615,820 ¥ 607,024 $ 6,547,794 See notes to consolidated financial statements.
30 Taiyo Nippon Sanso Corporation | Annual Report 2013 Thousands of U.S. dollars Millions of yen (Note 4) March 31 2013 2012 2013 Liabilities and net assets Current liabilities: Notes and accounts payable—trade (Note 15) ¥ 70,785 ¥ 75,927 $ 752,632 Short-term loans payable (Notes 7 and 15) 75,062 60,517 798,107 Income taxes payable (Note 10) 2,716 5,242 28,878 Other 27,676 28,040 294,269 Total current liabilities 176,242 169,729 1,873,918
Noncurrent liabilities: Long-term loans payable (Notes 7 and 15) 170,806 172,469 1,816,119 Pension and severance indemnities (Note 13) 4,641 4,948 49,346 Deferred tax liabilities (Note 10) 27,229 26,398 289,516 Negative goodwill 106 335 1,127 Lease obligations (Note 7) 5,061 6,030 53,812 Other 7,478 7,500 79,511 Total noncurrent liabilities 215,324 217,683 2,289,463
Contingent liabilities (Note 14) Total liabilities 391,566 387,413 4,163,381
Net assets (Notes 11 and 25): Shareholders’ equity: Common stock: Authorized—1,600,000,000 shares Issued—403,092,837 shares 27,039 27,039 287,496 Capital surplus 44,909 44,909 477,501 Retained earnings 159,999 166,835 1,701,212 Treasury stock, at cost— 15,237,498 shares in 2013 and 6,197,947 shares in 2012 (9,161) (4,125) (97,406) Total shareholders’ equity 222,787 234,659 2,368,814 Accumulated other comprehensive income: Valuation difference on available-for-sale securities 6,322 4,432 67,220 Deferred gains or losses on hedges (120) (26) (1,276) Foreign currency translation adjustments (25,020) (38,035) (266,029) Pension liability adjustment of foreign subsidiaries (197) (193) (2,095) Total accumulated other comprehensive income (loss) (19,016) (33,823) (202,190) Minority interests 20,481 18,775 217,767 Total net assets 224,253 219,611 2,384,402 Total liabilities and net assets ¥615,820 ¥607,024 $6,547,794
Taiyo Nippon Sanso Corporation | Annual Report 2013 31 Consolidated Statements of Operations
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries
Thousands of U.S. dollars Millions of yen (Note 4) Years ended March 31 2013 2012 2013 Net sales ¥468,387 ¥477,451 $4,980,191 Cost of sales (Note 17) 317,999 320,857 3,381,170 Gross profit 150,388 156,593 1,599,022 Selling, general and administrative expenses (Note 17) 125,503 125,526 1,334,428 Operating income 24,884 31,067 264,583 Other income (expenses): Interest and dividend income 970 1,036 10,314 Interest expenses (4,110) (4,292) (43,700) Amortization of negative goodwill 273 507 2,903 Gain on sales of noncurrent assets (Note 18) 31 3,385 330 Loss on sales and retirement of noncurrent assets (Note 18) (1,497) (5,206) (15,917) Foreign exchange losses — (6) — Loss on valuation of investment securities (89) (312) (946) Gain on sales of investment securities 78 — 829 Loss on valuation of golf club memberships (68) (48) (723) Equity in earnings of affiliates 1,284 1,158 13,652 Impairment loss (Note 19) (50) (213) (532) Provision of valuation allowance for investments (135) (70) (1,435) Loss on liquidation of subsidiaries and affiliates — (215) — Gain on transfer of business — 6,733 — Loss on disaster (Note 20) — (429) — Loss on liquidation of business (Note 21) (23,276) — (247,485) Other 1,256 844 13,355 (25,334) 2,868 (269,367) Income (loss) before income taxes and minority interests (450) 33,935 (4,785) Income taxes (Note 10): Current 4,588 9,428 48,783 Deferred (4,306) 2,106 (45,784) 281 11,535 2,988 Income (loss) before minority interests (731) 22,400 (7,772) Minority interests in income 1,339 1,199 14,237 Net income (loss) ¥ (2,071) ¥ 21,200 $ (22,020) U.S. dollars Yen (Note 4) Amounts per share: Net assets ¥525.38 ¥506.02 $ 5.59 Net income (loss) (5.25) 53.33 (0.06) Cash dividends 12.00 12.00 0.13 See notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries Thousands of U.S. dollars Millions of yen (Note 4) Year ended March 31 2013 2012 2013 Income (loss) before minority interests ¥ (731) ¥22,400 $ (7,772) Other comprehensive income (loss) (Note 22): Valuation difference on available-for-sale securities 1,853 (2,005) 19,702 Deferred gains or losses on hedges (93) 136 (989) Foreign currency translation adjustments 11,075 (3,815) 117,757 Pension liability adjustment of foreign subsidiaries (3) (53) (32) Share of other comprehensive income of associates accounted for using the equity method 1,134 (440) 12,057 Total other comprehensive income (loss) 13,966 (6,177) 148,495 Comprehensive income ¥13,234 ¥16,222 $140,712 Total comprehensive income attributable to: Owners of the Company ¥12,735 ¥14,874 $135,407 Minority interests 498 1,348 5,295 See notes to consolidated financial statements.
32 Taiyo Nippon Sanso Corporation | Annual Report 2013 Consolidated Statements of Changes in Net Assets
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries
Millions of yen Shareholders’ equity Accumulated other comprehensive income Valuation difference Pension Total Number of on Deferred Foreign liability accumulated shares of Total available- gains or currency adjustment other common Common Capital Retained Treasury shareholders’ for-sale losses on translation of foreign comprehensive Minority Total net stock stock surplus earnings stock equity securities hedges adjustments subsidiaries income (loss) interests assets Balance at April 1, 2011 403,092,837 ¥27,039 ¥44,910 ¥150,439 ¥(2,321) ¥220,068 ¥ 6,428 ¥(163) ¥(33,621) ¥(140) ¥(27,496) ¥14,845 ¥207,416 Disposal of treasury stock — — (0) — 3 3 — — — — — — 3 Dividends from surplus — — — (4,781) — (4,781) — — — — — — (4,781) Net income — — — 21,200 — 21,200 — — — — — — 21,200 Purchase of treasury stock — — — — (1,807) (1,807) — — — — — — (1,807) Decrease by merger — — — (23) — (23) — — — — — — (23) Net changes of items other than shareholders’ equity — — — — — — (1,995) 136 (4,413) (53) (6,326) 3,930 (2,396) Balance at March 31, 2012 403,092,837 ¥27,039 ¥44,909 ¥166,835 ¥(4,125) ¥234,659 ¥ 4,432 ¥ (26) ¥(38,035) ¥(193) ¥(33,823) ¥18,775 ¥219,611 Disposal of treasury stock — — (0) — 1 1 — — — — — — 1 Dividends from surplus — — — (4,764) — (4,764) — — — — — — (4,764) Net loss — — — (2,071) — (2,071) — — — — — — (2,071) Purchase of treasury stock — — — — (5,036) (5,036) — — — — — — (5,036) Net changes of items other than shareholders’ equity — — — — — — 1,889 (93) 13,015 (3) 14,807 1,706 16,513 Balance at March 31, 2013 403,092,837 ¥27,039 ¥44,909 ¥159,999 ¥(9,161) ¥222,787 ¥ 6,322 ¥(120) ¥(25,020) ¥(197) ¥(19,016) ¥20,481 ¥224,253
Thousands of U.S. dollars (Note 4) Shareholders’ equity Accumulated other comprehensive income Valuation difference Pension Total on Deferred Foreign liability accumulated Total available- gains or currency adjustment other Common Capital Retained Treasury shareholders’ for-sale losses on translation of foreign comprehensive Minority Total net stock surplus earnings stock equity securities hedges adjustments subsidiaries income (loss) interests assets Balance at April 1, 2012 $287,496 $477,501 $1,773,897 $(43,860) $2,495,045 $47,124 $ (276) $(404,413) $(2,052) $(359,628) $199,628 $2,335,045 Disposal of treasury stock —(0)—1111——————11 Dividends from surplus — — (50,654) — (50,654) — — — — — — (50,654) Net loss — — (22,020) — (22,020) — — — — — — (22,020) Purchase of treasury stock — — — (53,546) (53,546) — — — — — — (53,546) Net changes of items other than shareholders’ equity — — — — — 20,085 (989) 138,384 (32) 157,438 18,139 175,577 Balance at March 31, 2013 $287,496 $477,501 $1,701,212 $(97,406) $2,368,814 $67,220 $(1,276) $(266,029) $(2,095) $(202,190) $217,767 $2,384,402 See notes to consolidated financial statements.
Taiyo Nippon Sanso Corporation | Annual Report 2013 33 Consolidated Statements of Cash Flows
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries
Thousands of U.S. dollars Millions of yen (Note 4) Years ended March 31 2013 2012 2013 Operating activities Income (loss) before income taxes and minority interests ¥ (450) ¥ 33,935 $ (4,785) Depreciation and amortization 29,400 30,471 312,600 Impairment loss 50 213 532 Amortization of goodwill 2,719 2,472 28,910 Gain from transfer of business — (6,733) — Interest and dividends income (970) (1,036) (10,314) Interest expense 4,110 4,292 43,700 Equity in earnings of affiliates (1,284) (1,158) (13,652) Loss on sales and retirement of noncurrent assets 1,262 1,686 13,418 Gain on sales of investment securities (68) (28) (723) Loss on disaster — 429 — Loss on liquidation of business 23,276 — 247,485 Decrease (increase) in notes and accounts receivable—trade 12,403 (1,838) 131,877 Increase in accounts receivable—other (921) (958) (9,793) (Increase) decrease in advance payments (14) 466 (149) Decrease (increase) in inventories 2,376 (2,223) 25,263 (Decrease) increase in notes and accounts payable—trade (6,930) 7,196 (73,684) Decrease in accrued expenses (1,124) (2,500) (11,951) (Decrease) increase in advances received (266) 555 (2,828) Decrease in provision for retirement benefits (255) (204) (2,711) Decrease in prepaid pension costs 985 637 10,473 Other, net (2,330) 1,740 (24,774) 61,965 67,415 658,852 Interest and dividends income received 1,151 1,499 12,238 Interest expenses paid (4,122) (4,294) (43,828) Payments for loss on disaster — (1,560) — Payments for surcharges — (5,144) — Payments for loss on liquidation of business (17,059) — (181,382) Income taxes paid (7,970) (11,929) (84,742) Net cash provided by operating activities 33,964 45,986 361,127
Investing activities Increase in short-term investments (477) (530) (5,072) Purchases of property, plant and equipment (31,096) (35,101) (330,633) Proceeds from sales of property, plant and equipment 1,408 5,542 14,971 Purchases of intangible assets (445) (166) (4,732) Purchases of investment securities (2,139) (2,683) (22,743) Proceeds from sales of investment securities 152 75 1,616 Purchases of investments in subsidiaries resulting in change in scope of consolidation (Note 24) (513) (4,151) (5,455) Payments of loans receivable (601) (187) (6,390) Payments for assets purchase (Note 24) (2,417) (1,013) (25,699) Proceeds from transfer of business (Note 24) — 6,585 — Other, net (1,094) (1,118) (11,632) Net cash used in investing activities (37,225) (32,748) (395,800)
Financing activities Net increase (decrease) in short-term loans payable ¥ 349 ¥ (2,321) $ 3,711 Proceeds from long-term loans payable 34,108 18,727 362,658 Repayment of long-term loans payable (30,104) (24,642) (320,085) Proceeds from issuance of bonds 10,000 10,000 106,326 Redemption of bonds (10,000) (15,000) (106,326) Repayments of lease obligations (2,339) (3,406) (24,870) Purchase of treasury stock (5,011) (1,811) (53,280) Proceeds from sales of treasury stock 1 3 11 Cash dividends paid (4,764) (4,781) (50,654) Cash dividends paid to minority shareholders (421) (303) (4,476) Net cash used in financing activities (8,181) (23,536) (86,986) Effect of exchange rate change on cash and cash equivalents 888 (394) 9,442 Net decrease in cash and cash equivalents (10,554) (10,692) (112,217) Cash and cash equivalents at beginning of period 33,275 43,877 353,801 Increase in cash and cash equivalents resulting from merger with unconsolidated subsidiaries — 90 — Cash and cash equivalents at end of period (Note 24) ¥ 22,721 ¥ 33,275 $ 241,584 See notes to consolidated financial statements.
34 Taiyo Nippon Sanso Corporation | Annual Report 2013 Notes to Consolidated Financial Statements
Taiyo Nippon Sanso Corporation and Consolidated Subsidiaries
1. Basis of Consolidated Financial Statements
The accompanying consolidated financial statements of As permitted by the FIEA, amounts of less than one million TAIYO NIPPON SANSO CORPORATION (the “Company”) yen have been omitted. As a result, the totals shown in the and consolidated subsidiaries are prepared on the basis of accompanying consolidated financial statements (both in yen accounting principles generally accepted in Japan (“Japanese and U.S. dollars) do not necessarily agree with the sums of GAAP”), which are different in certain respects as to applica- the individual amounts. tion and disclosure requirements of International Financial Certain amounts previously reported have been reclassified Reporting Standards, and are compiled from the consolidated to conform to the current year presentation. financial statements prepared by the Company as required by the Financial Instruments and Exchange Act of Japan (the “FIEA”).
2. Summary of Significant Accounting Policies
(a) Consolidation net of the applicable income taxes, reported as a separate The accompanying consolidated financial statements include component of net assets. Cost of marketable securities sold is the accounts of the Company and its 110 significant subsid- determined by the moving-average method. Non-marketable iaries (111 in 2012). All significant intercompany accounts and securities classified as available-for-sale securities are carried transactions have been eliminated in consolidation. at cost determined by the moving-average method. Under the In accordance with the regulations for the preparation of Companies Act of Japan (the “Act”), unrealized gain or loss consolidated financial statements under the FIEA, investments on available-for-sale securities, net of the applicable income in certain unconsolidated subsidiaries and significant affiliates taxes, is not available for distribution as dividends. are accounted for by the equity method of accounting. The differences at the dates of acquisition between the (d) Inventories cost and the underlying net equity in investments in consoli- Inventories of the Company and its consolidated domestic dated subsidiaries and the companies accounted for by the subsidiaries are stated at cost, determined by the average equity method are amortized equally over the years for which method, specific identification method or the moving-average their effect are reasonably estimated. method (lower than book value due to decline in profitability). Investments in unconsolidated subsidiaries and affiliates As for overseas consolidated subsidiaries, inventories are other than those which are accounted for by the equity stated at the lower of cost or market, cost being determined method are principally stated at cost. by the first-in first-out method.
(b) Cash equivalents (e) Property, plant and equipment (except for the leased assets) For purposes of the statements of cash flows, the Company Property, plant and equipment is stated at cost, and for the considers all highly liquid instruments with maturity of three Company and its consolidated domestic subsidiaries, depre- months or less when purchased to be cash equivalents. ciation is principally computed by the straight-line method.
(c) Investment securities The useful lives are as follows: Investments in securities are classified into three categories: Buildings 3 to 50 years trading securities, held-to-maturity securities and available- Machinery 4 to 20 years for-sale securities. The Company and certain consolidated subsidiaries have marketable securities classified as available- As for consolidated overseas subsidiaries, depreciation is for-sale securities, which are carried at fair value with any also principally computed by the straight-line method based changes in valuation difference on available-for-sale securities, on the estimated useful lives of the respective assets.
Taiyo Nippon Sanso Corporation | Annual Report 2013 35 (f) Intangible assets exceeding the expected average remaining service years of Goodwill and other intangible assets are stated at cost. As the employees participating in the plan. The Company and its for the Company and its consolidated domestic subsidiaries, consolidated domestic subsidiaries recognize actuarial gains goodwill is amortized by the straight-line method over 5 years or losses evenly over 12 to 16 years following the respective and software is amortized by the straight-line method over fiscal years when such gains or losses are identified. Prior its estimated useful life of 5 years. Consolidated subsidiar- service cost is amortized using the straight-line method over ies in the United States apply the Accounting Standards 13 to 16 years. Codification 350, issued by the Financial Accounting The Company recognized the amount of unrecognized Standards Board (“Intangibles-Goodwill and Other”). prior service cost due to the revision of the retirement rule at April 1, 2003. (g) Leases For transition benefit liability, the Company established Leased assets are initially accounted for at their acquisition the pension and severance indemnity trust by contribution of costs and depreciated over the leased term by the straight- shares owned by the Company, and the remaining transition line method with no residual value. benefit liability is being recognized over a period of 15 years. Finance leases contracted on or before March 31, 2008 that do not deem to transfer ownership of the leased (j) Allowance for directors’ and corporate auditors’ retirement property to the lessee are accounted for as operating lease benefits transactions. The allowance for directors’ and corporate auditors’ retire- ment benefits of the Company and certain consolidated (h) Translation of foreign currency transactions domestic subsidiaries is provided at the amount which would All monetary assets and liabilities denominated in foreign have been required to be paid if all directors and corporate currencies other than receivables and payables hedged by auditors had voluntarily terminated their services as of the bal- qualified foreign exchange forward contracts, are translated ance sheet date. This amount has been determined in accor- into yen at the exchange rates prevailing as of the fiscal year- dance with the internal rules of the respective companies. end, and resulting gains and losses are included in income. The allowance included ¥550 million ($5,848 thousand) The accounts of the overseas consolidated subsidiaries and ¥505 million for corporate officers at March 31, 2013 and are translated into yen at the year-end exchange rates, except 2012, respectively. for net assets, which are translated at historical rates, and income statement items are translated into yen at average (k) Research and development expenses exchange rates during the year. Differences arising from the Research and development expenses are charged to translations are stated under “Foreign currency translation operations as incurred. adjustments” and “Minority interests” in the accompanying consolidated balance sheets. (l) Income taxes Deferred tax assets and liabilities are determined based on (i) Pension and severance indemnities the differences between financial reporting and the tax bases Allowance for employees’ retirement benefits is recognized at of assets and liabilities and are measured using the enacted the net total of the present value of the defined benefit obliga- tax rates and laws which will be in effect when the differences tion at the balance sheet date, plus any actuarial gains (less are expected to reverse. any actuarial losses) not yet recognized, minus the fair value of plan assets (if any) at the balance sheet date out of which the (m) Amounts per share obligations are to be settled directly. If the amount determined Presentation of diluted net income (loss) per share is not above is negative (an asset), such asset should be recorded applicable as there were no potentially dilutive securities for as prepaid pension expenses. the years ended March 31, 2013 and 2012. Net retirement benefit expense or income is recognized at the net total of current service cost and interest cost, (n) Allowance for doubtful accounts minus the expected return on any plan assets, minus any To cover possible losses on collection of receivables, the actuarial gains (less any actuarial losses) and prior service cost Company and its consolidated domestic subsidiaries provided recognized during the year, plus any retirement benefits paid for an allowance with respect to specific debts of which recov- at a lump sum. ery is doubtful, based on estimated write-off amounts, after To determine the present value of a defined benefit considering the likelihood of recovery on an individual basis. obligation and the related current service cost and, where applicable, the prior service cost, the project unit credit (o) Valuation allowance for investments method are used. To state the investment amount fairly, the allowance is Actuarial gains or losses and prior service cost are provided by considering the related parties’ assets and other recognized for each defined benefit plan over a period not factors.
36 Taiyo Nippon Sanso Corporation | Annual Report 2013 (p) Derivative and hedging transactions Moreover, if interest-rate swaps in Japan are specifically tied The Company and certain consolidated subsidiaries have to the hedged loan transactions, unrealized gains or losses on used foreign exchange forward contracts solely in order those swaps are not recognized in the consolidated financial to hedge against risks of fluctuations in foreign currency statements as such gains or losses are to be offset with those exchange rates relating to its receivables and payables on the hedged transactions. Deferred hedge accounting is denominated in foreign currencies, and have used interest- applied to currency swaps. rate swap agreements solely to hedge against risks of Receivables and payables hedged by qualified fluctuations in interest rates relating to its long-term loans pay- foreign exchange forward contracts are translated at the able. Also, currency exchange swap agreements have been corresponding foreign exchange forward contract rates. used solely to hedge against risks of fluctuations in foreign exchange of long-term loans payable denominated in foreign (q) Recognition of revenues and costs of construction contracts currencies, in compliance with the internal rules of respective Revenues and costs of construction contracts of which the companies. percentage of completion can be reliably estimated, are Under the “Accounting Standard for Financial Instruments” recognized by the percentage-of-completion method. The (Statement No. 10, issued by the Accounting Standards percentage of completion is calculated at the cost incurred Board of Japan (the “ASBJ”) on March 10, 2008) derivative as a percentage of the estimated total cost. The completed- transactions are valued at market prices, except for hedging contract method continues to be applied for contracts for transactions whose gains or losses are deferred and recorded which the percentage of completion cannot be reliably in the balance sheet until the hedged transactions are settled. estimated.
3. Accounting Standards Issued but Not Yet Effective
On May 17, 2012, the ASBJ issued “Accounting Standard for (b) Treatment in the consolidated statement of operations and Retirement Benefits” (ASBJ Statement No.26) and “Guidance the consolidated statement of comprehensive income on Accounting Standard for Retirement Benefits” (ASBJ Actuarial gains and losses and prior service cost that arose Guidance No.25), which replaced the Accounting Standard in the current period and have yet to be recognized in profit for Retirement Benefits that had been issued by the Business or loss shall be included in other comprehensive income and Accounting Council in 1998 with an effective date of April 1, actuarial gains and losses and prior service costs that were 2000 and the other related practical guidance, being followed recognized in other comprehensive income in prior periods by partial amendments from time to time through 2009. The and then are recognized in profit or loss in the current period major changes are as follows: shall be treated as reclassification adjustments.
(1) Overview (2) Expected application date (a) Treatment in the consolidated balance sheets This standard and related guidance are effective as of the end Actuarial gains and losses and prior service costs that have of fiscal years beginning on or after April 1, 2013. However, yet to be recognized in profit or loss shall be recognized within no retrospective application of this accounting standard to net assets (accumulated other comprehensive income), after consolidated financial statements in prior periods is required. adjusting for tax effects, and the deficit or surplus shall be recognized as a liability or asset. (3) Effects of the adoption of the standard and the guidance The Company is currently evaluating the effect that these modifications will have on its consolidated results of operations and financial position.
4. U.S. Dollar Amounts
The translation of Japanese yen amounts into U.S. dollar ¥101.18=U.S.$1. The translation should not be construed as amounts is included solely for convenience, as a matter of a representation that Japanese yen have been, could have arithmetical computation only, at the rate of ¥94.05=U.S.$1, been, or could in the future be converted into U.S. dollars at the approximate rate of exchange at March 31, 2013. The the above or any other rate. approximate rate of exchange prevailing at May 31, 2013 was
Taiyo Nippon Sanso Corporation | Annual Report 2013 37 5. Investment Securities At March 31, 2013 and 2012, information with respect to available-for-sale securities for which market prices were available was summarized as follows:
Millions of yen Thousands of U.S. dollars 2013 2013 Carrying Acquisition Unrecognized Carrying Unrecognized amount cost gain (loss) amount Acquisition cost gain (loss) Unrecognized gain items: Stock ¥23,869 ¥12,746 ¥11,122 $253,791 $135,524 $118,256 Unrecognized loss items: Stock 9,492 10,932 (1,440) 100,925 116,236 (15,311) Total ¥33,361 ¥23,679 ¥ 9,681 $354,716 $251,770 $102,935
Millions of yen 2012 Carrying Acquisition Unrecognized amount cost gain (loss) Unrecognized gain items: Stock ¥19,305 ¥10,951 ¥ 8,353 Unrecognized loss items: Stock 10,147 11,647 (1,499) Total ¥29,453 ¥22,599 ¥ 6,853
Proceeds from sales of securities classified as available- March 31, 2013 and 2012, respectively, and an aggregate for-sale securities amounted to ¥142 million ($1,510 thou- loss on sales of ¥9 million ($96 thousand) and ¥1 million for sand) and ¥36 million with an aggregate gain on sales of ¥78 the years ended March 31, 2013 and 2012, respectively. million ($829 thousand) and ¥8 million for the years ended
6. Notes and Accounts Receivable
(a) Notes and accounts receivable liquidated at March 31, 2013 and 2012 were as follows: Thousands of Millions of yen U.S. dollars 2013 2012 2013 Accounts receivable transferred by liquidation ¥4,376 ¥3,809 $46,528 Notes receivable transferred by liquidation 5,665 6,177 60,234
(b) Notes receivable discounted at March 31, 2013 and 2012 were as follows: Thousands of Millions of yen U.S. dollars 2013 2012 2013 Notes receivable discounted ¥9 ¥5 $96
7. Short-Term Loans Payable, Long-Term Loans Payable and Lease Obligations
As of March 31, 2013 and 2012, short-term loans payable and the current portion of long-term loans payable consisted of the following:
Thousands of Millions of yen U.S. dollars 2013 2012 2013 Bank loans ¥23,575 ¥20,699 $250,665 Current portion of long-term loans payable 51,487 29,818 547,443 1.58% unsecured bonds, payable in yen, due 2012 — 10,000 — Total ¥75,062 ¥60,517 $798,107
The average interest rates applicable to bank loans outstanding at March 31, 2013 and 2012 are 1.25% and 1.18%, respectively.
38 Taiyo Nippon Sanso Corporation | Annual Report 2013 Long-term loans payable at March 31, 2013 and 2012 consisted of the following: Thousands of Millions of yen U.S. dollars 2013 2012 2013 Loans from banks due through 2019 at average interest rates of 1.56% in 2013 and 1.84% in 2012 ¥135,806 ¥147,469 $1,443,977 1.13% unsecured bonds, payable in yen, due 2014 15,000 15,000 159,490 0.55% unsecured bonds, payable in yen, due 2017 10,000 10,000 106,326 0.44% unsecured bonds, payable in yen, due 2017 10,000 — 106,326 ¥170,806 ¥172,469 $1,816,119
Short-term lease obligations at March 31, 2013 and 2012 included in other current liabilities were ¥2,493 million ($26,507 thou- sand) and ¥2,103 million, respectively.
The annual maturities of long-term loans payable The annual maturities of lease obligations subsequent to subsequent to March 31, 2013 are summarized as follows: March 31, 2013 are summarized as follows:
Thousands of Thousands of Years ending March 31 Millions of yen U.S. dollars Years ending March 31 Millions of yen U.S. dollars 2014 ¥ 51,487 $ 547,443 2014 ¥2,493 $26,507 2015 41,180 437,852 2015 1,420 15,098 2016 25,181 267,741 2016 1,166 12,398 2017 37,341 397,033 2017 826 8,783 2018 21,978 233,684 2018 964 10,250 2019 and thereafter 10,124 107,645 2019 and thereafter 685 7,283 ¥187,293 $1,991,419 ¥7,554 $80,319
8. Pledged Assets
Assets pledged as collateral for short-term loans payable of thousand) and ¥142 million and other of ¥91 million ($968 ¥96 million ($1,021 thousand) and ¥120 million, long-term thousand) and ¥53 million at March 31, 2013 and 2012, loans payable of ¥308 million ($3,275 thousand) and ¥425 respectively, were as follows: million, accounts payable-trade of ¥132 million ($1,404 Thousands of Millions of yen U.S. dollars 2013 2012 2013 Property, plant and equipment, at net book value ¥799 ¥982 $8,495
9. Assets Replaced by National Subsidy
Assets replaced by national subsidy at March 31, 2013 and 2012 were as follows: Thousands of Millions of yen U.S. dollars 2013 2012 2013 Property, plant and equipment ¥411 ¥411 $4,370
Taiyo Nippon Sanso Corporation | Annual Report 2013 39 10. Income Taxes
Income taxes applicable to the Company comprise corpora- Significant components of the Company’s deferred tax tion, enterprise and inhabitants’ taxes, which, in the aggre- assets and liabilities at March 31, 2013 and 2012 were as gate, resulted in statutory tax rates of 38.01% and 40.69% for follows: the years ended March 31, 2013 and 2012, respectively. Thousands of Millions of yen U.S. dollars 2013 2012 2013 Current deferred tax assets and liabilities Deferred tax assets: Accrued bonus ¥ 1,998 ¥ 2,048 $ 21,244 Loss from valuation of inventory 587 339 6,241 Accrued expenses 1,618 1,361 17,204 Net operating loss carryforward for tax purposes 2,454 — 26,093 Other 1,020 1,764 10,845 Deferred tax assets—subtotal 7,678 5,513 81,637 Valuation allowance (389) (250) (4,136) Deferred tax assets—net 7,289 5,262 77,501 Deferred tax liabilities (4) (46) (43) Net deferred tax assets ¥ 7,285 ¥ 5,216 $ 77,459 Deferred tax liabilities: Adjustment of allowance for doubtful accounts ¥ (71) ¥ (112) $ (755) Deferred tax liabilities – subtotal (71) (112) (755) Offset by deferred tax assets 4 46 43 Net deferred tax liabilities ¥ (66) ¥ (66) $ (702) Noncurrent deferred tax assets and liabilities Deferred tax assets: Depreciation ¥ 1,711 ¥ 1,451 $ 18,192 Reserve for retirement benefits 1,215 1,295 12,919 Net operating loss carryforward for tax purposes 2,860 — 30,409 Other 7,675 8,085 81,606 Deferred tax assets—subtotal 13,463 10,832 143,147 Valuation allowance (4,444) (4,983) (47,251) Deferred tax assets—net 9,018 5,848 95,885 Deferred tax liabilities (6,960) (3,743) (74,003) Net deferred tax assets ¥ 2,057 ¥ 2,105 $ 21,871 Deferred tax liabilities: Valuation difference on available-for-sale securities ¥ (3,471) ¥ (2,445) $ (36,906) Reserve for replacement of fixed assets (4,460) (4,984) (47,422) Reserve for special depreciation (34) (68) (362) Reserve for replacement of fixed assets—special (389) (385) (4,136) Depreciation (13,307) (11,811) (141,489) Other (12,528) (10,446) (133,206) Deferred tax liabilities—subtotal (34,190) (30,142) (363,530) Offset by deferred tax assets 6,960 3,743 74,003 Net deferred tax liabilities ¥(27,229) ¥(26,398) $(289,516)
40 Taiyo Nippon Sanso Corporation | Annual Report 2013 Reconciliation between the normal effective statutory tax rate and the actual effective tax rates reflected in the accompanying consolidated statements of operations for the year ended March 31, 2012 was as follows: 2012 Statutory tax rate 40.69% Entertainment expenses and others not deductible permanently 0.98 Dividends received and others (5.08) Valuation allowance for deferred tax assets (1.80) Income tax rate changes (2.70) Other 1.90 Effective tax rates 33.99%
The reconciliation of the difference between the statutory tax rate and the effective tax rate for the year ended March 31, 2013 was not presented since the Company recorded loss before income taxes and minority interests.
11. Shareholders’ Equity
(a) Dividends charged upon the payment of such dividends until the total Under the Act, companies can pay dividends at any time of aggregate amount of legal reserve and additional paid-in during the fiscal year in addition to the year-end dividend upon capital equals 25% of the common stock. Under the Act, the resolution at the shareholders’ meeting. For companies that total amount of additional paid-in capital and legal reserve meet certain criteria, such as: (1) having a Board of Directors, may be reversed without limitation. (2) having independent auditors, (3) having a Board of The Act also provides that common stock, legal reserve, Corporate Auditors, and (4) the term of service of the directors additional paid-in capital, other capital surplus and retained is prescribed as one year rather than two years of normal earnings can be transferred among the accounts under term by its articles of incorporation, the Board of Directors certain conditions upon resolution of the shareholders. may declare dividends (except for dividends in kind) if the Company has prescribed so in its articles of incorporation. (c) Treasury stock and treasury stock acquisition rights The Act permits companies to distribute dividends-in-kind The Act also provides for companies to purchase treasury (non-cash assets) to shareholders subject to a certain limita- stock and dispose of such treasury stock by resolution of the tion and additional requirements. Board of Directors. The amount of treasury stock purchased Semiannual interim dividends may also be paid once a cannot exceed the amount available for distribution to the year upon resolution by the Board of Directors if the articles of shareholders, which is determined by specific formula. Under incorporation of the Company so stipulate. the Act, stock acquisition rights, which were previously presented as a liability, are now presented as a separate (b) Increases/decreases and transfer of common stock, reserve component of shareholders’ equity. and surplus The Act also provides that companies can purchase both The Act requires that an amount equal to 10% of dividends treasury stock acquisition rights and treasury stock. Such must be appropriated as a legal reserve (a component of treasury stock acquisition rights are presented as a separate retained earnings) or as additional paid-in capital (a com- component of shareholders’ equity or deducted directly from ponent of capital surplus) depending on the equity account stock acquisition rights.
Taiyo Nippon Sanso Corporation | Annual Report 2013 41 12. Leases
(a) The following pro forma amounts represent the acquisition sheets if finance lease accounting had been applied to the costs, accumulated depreciation and net book value of finance lease transactions currently accounted for as leased property at March 31, 2013 and 2012, which operating leases: would have been reflected in the consolidated balance Thousands of Millions of yen U.S. dollars 2013 2012 2013 Acquisition costs: Property, plant and equipment ¥1,951 ¥3,140 $20,744 Other assets 62 235 659 ¥2,014 ¥3,375 $21,414 Accumulated depreciation: Property, plant and equipment ¥1,633 ¥2,541 $17,363 Other assets 62 228 659 ¥1,697 ¥2,769 $18,044 Net book value: Property, plant and equipment ¥ 317 ¥ 598 $ 3,371 Other assets — 7 — ¥ 317 ¥ 606 $ 3,371
Lease payments relating to finance lease transactions depreciation expense of the leased assets computed by the accounted for as operating leases amounted to ¥211 million straight-line method over the respective lease terms for the ($2,243 thousand) and ¥692 million, which were equal to the years ended March 31, 2013 and 2012, respectively.
Future minimum lease payments (including the interest portion thereon) subsequent to March 31, 2013 and 2012 for finance lease transactions accounted for as operating leases are summarized as follows: Thousands of Years ending March 31 Millions of yen U.S. dollars 2013 2014 ¥ 132 $1,404 2015 and thereafter 185 1,967 Total ¥ 317 $3,371 2012 2013 ¥ 251 2014 and thereafter 354 Total ¥ 606
(b) Future minimum lease payments subsequent to March 31, 2013 and 2012 for non-cancelable operating leases are summarized as follows: Thousands of Years ending March 31 Millions of yen U.S. dollars 2013 2014 ¥ 1,551 $ 16,491 2015 and thereafter 8,639 91,855 Total ¥10,191 $108,357 2012 2013 ¥ 1,355 2014 and thereafter 8,613 Total ¥ 9,969
42 Taiyo Nippon Sanso Corporation | Annual Report 2013 13. Pension and Severance Indemnities
The Company has the cash balance plan (market rate-linked Certain consolidated overseas subsidiaries have a defined pension plan) and the defined contribution benefit plan. contribution benefit plan. The Company’s consolidated domestic subsidiaries have, The funded status and amounts recognized in the accom- jointly or severally, defined benefit plans, including funded panying consolidated balance sheets at March 31, 2013 and non-contributory tax-qualified retirement pension plans and 2012 and the components of net retirement benefit expenses a lump-sum retirement benefits plan, which together cover recognized in the accompanying consolidated statements of substantially all full-time employees who meet certain eligibility operations for the years ended March 31, 2013 and 2012 are requirements. summarized as follows:
(a) Retirement benefit liabilities Thousands of Millions of yen U.S. dollars 2013 2012 2013 Projected benefit obligation ¥ 32,019 ¥ 34,578 $ 340,447 Plan assets at fair market value (32,616) (30,055) (346,794) Unfunded retirement benefit liabilities (597) 4,523 (6,348) Net unrecognized actuarial losses (6,200) (11,940) (65,922) Difference at change of accounting standard (916) (1,375) (9,740) Unrecognized prior service cost 1,238 1,585 13,163 Prepaid pension cost 9,804 10,790 104,242 Allowance for employees’ retirement benefits (3,327) (3,583) (35,375)
(b) Net retirement benefit expenses Thousands of Millions of yen U.S. dollars 2013 2012 2013 Current service cost ¥1,368 ¥1,346 $14,545 Interest cost 590 597 6,273 Expected return on plan assets (729) (716) (7,751) Expense of actuarial loss 1,406 1,364 14,949 Net loss on change in accounting standard for employees’ retirement benefits 461 461 4,902 Adjustment for prior service cost (226) (235) (2,403) Total of retirement benefit expenses ¥2,871 ¥2,817 $30,526 Other 951 851 10,112 Total ¥3,822 ¥3,668 $40,638
(c) The principal assumptions used in determining retirement benefit obligations and other components for the Company and certain consolidated domestic subsidiaries plans are shown below:
2013 2012 Discount rate Mainly 2.0% Mainly 2.0% Rate of return on assets Mainly 3.0% Mainly 3.0% Period of recognition of actuarial gains or losses 12 to 16 years 12 to 16 years Period of recognition of transition gains or losses Mainly 15 years Mainly 15 years Period of recognition of prior service cost 13 to 16 years 13 to 16 years Allocation method of estimated retirement benefits Evenly for period Evenly for period
14. Contingent Liabilities
At March 31, 2013 and 2012, the Company and certain con- investors amounting to ¥747 million ($7,943 thousand) and solidated subsidiaries had contingent liabilities as guarantor of ¥489 million and commitments to guarantees amounting to indebtedness, amounting to ¥6,173 million ($65,635 thou- ¥93 million ($989 thousand) and ¥181 million, respectively. sand) and ¥7,424 million, which included reguarantees by joint
Taiyo Nippon Sanso Corporation | Annual Report 2013 43 15. Financial Instruments
(a) Policy for financial instruments capital. Some of those loans with variable interest rates are In consideration of plans for capital investment, the Company exposed to interest rate fluctuation risk. However, to reduce and consolidated subsidiaries (collectively, the “Group”) raise such risk and fix interest expense for those loans bearing funds through bank loans or bond issues. The Group man- interest at variable rates, the Group utilizes interest-rate swap ages temporary cash surpluses through short-term deposits transactions for each loan contract to hedge such risks and to and obtains necessary borrowings through short-term loans. fix interest expenses. The Group uses derivatives only for the purpose of reducing Regarding derivatives, the Group enters into forward risk and does not enter into derivatives for speculative or foreign exchange contracts to reduce the foreign currency trading purposes. exchange risk arising from the trade receivables and payables denominated in foreign currencies. The Group also enters into (b) Types of financial instruments and related risk and risk interest-rate and foreign currency swap transactions to reduce management fluctuation risk deriving from interest payable for loans and Notes and accounts receivable – trade are exposed to credit bonds bearing interest at variable rates. risk in relation to customers. In accordance with the internal Information regarding the method of hedge accounting, policies of the Group for managing credit risk arising from hedging instruments and hedged items, hedging policy, and receivables, each related division monitors credit worthiness of the assessment of the effectiveness of hedging activities is their main customers periodically, and monitors due dates and found in Note 2. (p). Derivative and hedging transactions. outstanding balances by individual customer. In conducting derivative transactions, the division in Investment securities are exposed to market risk. Those charge of each derivative transaction follows the internal securities are composed of mainly the shares of common policies and the Group enters into derivative transactions only stock of other companies with which the Group has business with financial institutions which have a sound credit profile. relationships. The Group also reviews their fair value quarterly. Notes and accounts payable – trade have payment due (c) Fair value of financial instruments dates within one year. Although the Group is exposed to The fair value of financial instruments is based on their market liquidity risk arising from those payables the Group manages price, if available. When there is no market price available, the risk by preparing cash management plans monthly. fair value is reasonably estimated. In addition, the notional Short-term loans payable are raised mainly for short-term amounts of derivatives in Note 16. “Derivative and Hedging capital and long-term loans are mostly taken out principally Activities” are not necessarily indicative of the actual market for the purpose of making capital investments and long-term risk involved in derivative transactions.
(1) Fair value of financial instruments Carrying amount on the consolidated balance sheets as of March 31, 2013 and 2012 and estimated fair value and differences of financial instruments were as follows:
Millions of yen Thousands of U.S. dollars 2013 2013 Carrying Fair Carrying Fair amount value Difference amount value Difference Cash and deposits ¥ 24,743 ¥ 24,743 ¥ — $ 263,083 $ 263,083 $ — Notes and accounts receivable—trade 123,282 123,282 — 1,310,813 1,310,813 — Investment securities: Available-for-sale securities 33,361 33,361 — 354,716 354,716 — Total assets ¥181,386 ¥181,386 ¥ — $1,928,612 $1,928,612 $ — Notes and accounts payable—trade ¥ 70,785 ¥ 70,785 ¥ — $ 752,632 $ 752,632 $ — Short-term loans payable 23,575 23,575 — 250,665 250,665 — Long-term loans payable 222,293 225,607 3,313 2,363,562 2,398,799 35,226 Total liabilities ¥316,654 ¥319,968 ¥3,313 $3,366,869 $3,402,105 $35,226
44 Taiyo Nippon Sanso Corporation | Annual Report 2013 Millions of yen 2012 Carrying Fair amount value Difference Cash and deposits ¥ 34,596 ¥ 34,596 ¥ — Notes and accounts receivable—trade 132,176 132,176 — Investment securities: Available-for-sale securities 29,453 29,453 — Total assets ¥196,226 ¥196,226 ¥ — Notes and accounts payable—trade ¥ 75,927 ¥ 75,927 ¥ — Short-term loans payable 20,699 20,699 — Long-term loans payable 212,288 215,322 3,035 Total liabilities ¥308,914 ¥311,950 ¥3,035
The table above does not include financial instruments for current portion of long-term loans payable shown as “Short- which it is extremely difficult to determine the fair value. For term loans payable” in consolidated balance sheets are information on those items, please refer to note (2) below. The included in “Long-term loans payable” in the table above.
Valuation method of fair value of financial instruments and information on investment securities and derivative transactions were as follows:
Cash and deposits and notes and accounts receivable – trade Long-term loans payable Since these items are settled in a short period of time, their The fair value of bonds is measured at the quoted market carrying amount approximates fair value. price. The fair value of long-term loans payable other than bonds is based on the present value of the total of principal Investment securities and interest discounted by the interest rate combined of the The fair value of stocks is based on quoted market prices of risk free rate and credit spread. Interest-rate swap transac- the stock exchange. For information on securities classified tions are utilized for most variable rate loans to fix interest by holding purpose, please refer to Note 5. “Investment expense. All interest-rate swap transactions meet the criteria securities.” for the short-cut method of interest-rate swap transactions and are integrally processed with those loans. Therefore, the Notes and accounts payable—trade and short-term loans fair value of those loans is based on the present value of the payable total of principal and interest processed with interest-rate Since these items are settled in a short period of time, their swap discounted by the rate above. carrying amount approximates fair value.
(2) Financial instruments as of March 31, 2013 and 2012 for which it is extremely difficult to determine the fair value Thousands of Millions of yen U.S. dollars 2013 2012 2013 Unlisted stocks ¥26,749 ¥21,417 $284,413
(3) Redemption schedule for financial assets with maturities subsequent to March 31, 2013 and 2012 Thousands of Millions of yen U.S. dollars 2013 2012 2013 Due in one year or less Cash and deposits ¥ 24,743 ¥ 34,596 $ 263,083 Notes and accounts receivable—trade 123,282 132,176 1,310,813
(4) Redemption schedule for long-term loans payable is disclosed in Note 7. “Short- Term Loans Payable, Long-Term Loans Payable and Lease Obligations.”
(5) Unused overdraft agreements and loan commitment lines were ¥47,295 million ($502,871 thousand) and ¥55,771 million as of March 31, 2013 and 2012, respectively.
Taiyo Nippon Sanso Corporation | Annual Report 2013 45 16. Derivative and Hedging Activities Derivative transactions for which hedge accounting is applied for the years ended March 31, 2013 and 2012 were as follows:
(a) Currency-related Millions of yen 2013 Contract Due after Fair Hedged item amount one year value Deferral hedge accounting Foreign exchange forward contracts: Sell: Accounts receivable—trade USD ¥1,166 ¥ — * TWD 3— MYD 478 — Buy: Accounts payable—trade USD 975 — EUR 269 — CHF 169 — SGD 1— TWD 1,418 — Foreign currency swaps: Sell: Long-term loans payable USD 1,002 85 Buy: SGD 395 169 Total ¥5,879 ¥255 * The estimated fair value of the foreign exchange forward contracts and foreign currency swaps is included in the fair value of the receivables/payables as the hedged items.
Millions of yen 2012 Contract Due after Fair Hedged item amount one year value Deferral hedge accounting Foreign exchange forward contracts: Sell: Accounts receivable—trade USD ¥ 80 ¥ — * TWD 25 — MYD 754 — Buy: Accounts payable—trade USD 2,899 — EUR 300 — GBP 12 — CHF 184 — SGD 76 — TWD 747 — Foreign currency swaps: Sell: Long-term loans payable USD 863 863 Buy: SGD 704 704 Total ¥6,648 ¥1,568 * The estimated fair value of the foreign exchange forward contracts and foreign currency swaps is included in the fair value of the receivables/payables as the hedged items.
46 Taiyo Nippon Sanso Corporation | Annual Report 2013 Thousands of U.S. dollars 2013 Contract Due after Fair Hedged item amount one year value Deferral hedge accounting Foreign exchange forward contracts: Sell: Accounts receivable—trade USD $12,398 $ — * TWD 32 — MYD 5,082 — Buy: Accounts payable—trade USD 10,367 — EUR 2,860 — CHF 1,797 — SGD 11 — TWD 15,077 — Foreign currency swaps: Sell: Long-term loans payable USD 10,654 904 Buy: SGD 4,200 1,797 Total $62,509 $2,711 * The estimated fair value of the foreign exchange forward contracts and foreign currency swaps is included in the fair value of the receivables/payables as the hedged items.
(b) Interest-related Millions of yen Thousands of U.S. dollars 2013 2013 Contract Due after Fair Contract Due after Fair Hedged item amount one year value amount one year value Short-cut method Interest-rate swap agreements: Receive floating/Pay fix Long-term loans payable ¥53,646 ¥38,028 * $570,399 $404,338 *
Millions of yen 2012 Contract Due after Fair Hedged item amount one year value Short-cut method Interest-rate swap agreements: Receive floating/Pay fix Long-term loans payable ¥58,075 ¥45,873 * * The estimated fair value of the interest-rate swap agreements is included in the fair value of long-term loans payable as the hedged item.
Taiyo Nippon Sanso Corporation | Annual Report 2013 47 17. Research and Development Costs
Research and development costs included in cost of sales and selling, general and administrative expenses for the years ended March 31, 2013 and 2012 totaled ¥3,177 million ($33,780 thousand) and ¥3,458 million, respectively.
18. Gain and Loss on Sales and Retirement of Noncurrent Assets
Significant components of the gain on sales of noncurrent Significant components of the loss on sales and retire- assets of ¥31 million ($330 thousand) and ¥3,385 million for ment of noncurrent assets of ¥1,497 million ($15,917 thou- the years ended March 31, 2013 and 2012, respectively, sand) and ¥5,206 million for the years ended March 31, were as follows: 2013 and 2012, respectively, were as follows:
Thousands of Thousands of Millions of yen U.S. dollars Millions of yen U.S. dollars 2013 2012 2013 2013 2012 2013 Land and buildings ¥31 ¥3,385 $330 Land and buildings ¥— ¥4,623 $—
19. Impairment Loss
The Company and its consolidated subsidiaries categorize loss of ¥50 million ($532 thousand) and ¥213 million for the business assets by business segmentation and idle assets years ended March 31, 2013 and 2012, respectively, due to without a specific future use are categorized separately. For lack of recovery provability of market value or recovery prov- idle assets affected by a decrease in the fair market value of ability in the near future. Recoverable amounts for relevant land, the book values are written down to the recoverable assets are estimated net selling price (considerable declared amount and such write-downs were recorded as impairment price based on valuation by property tax).
20. Loss on Disaster
The amount recorded in loss on disaster in the accompanying property, plant and equipment, and loss on disposal of consolidated statement of operations corresponds to inventories. For the year ended March 31, 2013, no loss expenses required for recovery of assets damaged by the on disaster was recognized. Great East Japan Earthquake, such as repair expenses of
21. Loss on Liquidation of Business
The amount recorded in loss on liquidation of business in the monosilane gas, which consisted of early termination costs of accompanying consolidated statement of operations corre- ¥19,800 million ($210,526 thousand) and losses from the sponds to expenses to terminate the joint activities with liquidation of the joint venture and others of ¥3,476 million Evonik Degussa Japan Co., Ltd. for the manufacturing of ($36,959 thousand) for the year ended March 31, 2013.
48 Taiyo Nippon Sanso Corporation | Annual Report 2013 22. Other Comprehensive Income
Reclassification adjustments and tax effects allocated to each component of other comprehensive income for the years ended March 31, 2013 and 2012 were as follows: Thousands of Millions of yen U.S. dollars 2013 2012 2013 Valuation difference on available-for-sale securities: Amount arising during the year ¥ 2,869 ¥(3,794) $ 30,505 Reclassification adjustments for gains and losses included in net income (loss) 25 312 266 Amount before tax effects 2,894 (3,481) 30,771 Tax effects (1,041) 1,476 (11,069) Valuation difference on available-for-sale securities 1,853 (2,005) 19,702 Deferred gains or losses on hedges: Amount arising during the year 58 80 617 Reclassification adjustments for gains and losses included in net income (loss) (199) 133 (2,116) Amount before tax effects (140) 213 (1,489) Tax effects 47 (77) 500 Deferred gains or losses on hedges (93) 136 (989) Foreign currency translation adjustments: Amount arising during the year 11,075 (4,167) 117,757 Reclassification adjustments for gains and losses included in net income (loss) — 253 — Amount before tax effects 11,075 (3,914) 117,757 Tax effects — 99 — Foreign currency translation adjustments 11,075 (3,815) 117,757 Pension liability adjustment of foreign subsidiaries: Amount arising during the year (34) (124) (362) Reclassification adjustments for gains and losses included in net income (loss) 42 35 447 Amount before tax effects 8 (89) 85 Tax effects (11) 36 (117) Pension liability adjustment of foreign subsidiaries (3) (53) (32) Share of other comprehensive income of associates accounted for using the equity method: Amount arising during the year 1,134 (440) 12,057 Total other comprehensive income (loss) ¥13,966 ¥(6,177) $148,495
23. Segment Information
(a) Overview of reportable segments The “Electronics” segment produces and sells gases The reportable segments of the Company are components and related equipment used in the domestic and overseas for which discrete financial information is available and whose electronics industry. operating results are regularly reviewed by the Board of The “Energy” segment sells liquefied petroleum gas in Directors to make decisions about resource allocation and to Japan. assess performance. The “Other” segment mainly consists of the medical- The Company is made up of segments based on indi- related business which sells medial gas, and the thermos vidual business headquarters classified by products, services business which produces and sells housewares. and sales markets. Therefore, the reportable segments of the Company consist of “Industrial gas,” “Electronics,” “Energy” (b) Method of calculating net sales, income (loss), assets, and “Other.” liabilities and other items by reportable segment The “Industrial gas” segment produces and sells gases Accounting policies of the reportable segments are consistent and related equipment used in the domestic and overseas to those described in Note 2. “Summary of Significant steel and chemical industry. The plant engineering business is Accounting Policies.” Segment income is based on operat- included in this segment considering the similarities of major ing income. Intersegment sales or transfers are based on customers. prevailing market price.
Taiyo Nippon Sanso Corporation | Annual Report 2013 49 (c) Net sales, income (loss), assets, liabilities and other items by reportable segment Millions of yen 2013 Reportable segments Industrial gas Electronics Energy Other Total Adjustments Consolidated Net sales: Sales to third parties ¥298,073 ¥96,546 ¥40,031 ¥33,736 ¥468,387 ¥ — ¥468,387 Intersegment sales or transfers 1,742 157 1,985 2,552 6,437 (6,437) — Total 299,816 96,703 42,016 36,289 474,825 (6,437) 468,387 Segment income (operating income) ¥ 21,322 ¥ (536) ¥ 1,808 ¥ 3,291 ¥ 25,885 ¥(1,000) ¥ 24,884 Other item: Depreciation expenses ¥ 17,977 ¥ 9,806 ¥ 446 ¥ 1,493 ¥ 29,724 ¥ (323) ¥ 29,400
Millions of yen 2012 Reportable segments Industrial gas Electronics Energy Other Total Adjustments Consolidated Net sales: Sales to third parties ¥291,057 ¥115,294 ¥38,881 ¥32,218 ¥477,451 ¥ — ¥477,451 Intersegment sales or transfers 2,143 107 2,431 2,696 7,379 (7,379) — Total 293,201 115,402 41,312 34,914 484,830 (7,379) 477,451 Segment income (operating income) ¥ 21,712 ¥ 5,914 ¥ 1,667 ¥ 2,723 ¥ 32,018 ¥ (950) ¥ 31,067 Other item: Depreciation expenses ¥ 18,501 ¥ 10,360 ¥ 534 ¥ 1,511 ¥ 30,907 ¥ (435) ¥ 30,471
Thousands of U.S. dollars 2013 Reportable segments Industrial gas Electronics Energy Other Total Adjustments Consolidated Net sales: Sales to third parties $3,169,304 $1,026,539 $425,635 $358,703 $4,980,191 $ — $4,980,191 Intersegment sales or transfers 18,522 1,669 21,106 27,135 68,442 (68,442) — Total 3,187,836 1,028,208 446,741 385,848 5,048,644 (68,442) 4,980,191 Segment income (operating income) $ 226,709 $ (5,699) $ 19,224 $ 34,992 $ 275,226 $(10,633) $ 264,583 Other item: Depreciation expenses $ 191,143 $ 104,264 $ 4,742 $ 15,875 $ 316,045 $ (3,434) $ 312,600 Notes: 1. Adjustments for segment income of ¥(1,000) million ($(10,633) thousand) and ¥(950) million for the years ended March 31, 2013 and 2012 include interseg- ment eliminations of ¥383 million ($4,072 thousand) and ¥85 million, and corporate general administration expenses which mainly consisted of basic research and development expenses and are not allocable to each reportable segment of ¥(1,384) million ($(14,716) thousand) and ¥(1,035) million, respectively. 2. The Company does not allocate assets to reportable segments.
50 Taiyo Nippon Sanso Corporation | Annual Report 2013 (d) Information by geographical area
(1) Net sales (2) Property, plant and equipment Millions of yen Millions of yen 2013 2013 Japan The United States Others Total Japan The United States Others Total ¥329,771 ¥81,024 ¥57,592 ¥468,387 ¥159,074 ¥82,994 ¥30,073 ¥272,142
Millions of yen Millions of yen 2012 2012 Japan The United States Others Total Japan The United States Others Total ¥352,727 ¥81,684 ¥43,039 ¥477,451 ¥160,907 ¥69,122 ¥25,469 ¥255,499
Thousands of U.S. dollars Thousands of U.S. dollars 2013 2013 Japan The United States Others Total Japan The United States Others Total $3,506,337 $861,499 $612,355 $4,980,191 $1,691,377 $882,446 $319,755 $2,893,589
(e) Information about major customers Information about major customers is not disclosed since there are no outside customers that make up more than 10% of net sales on the consolidated statement of operations.
(f) Information on impairment loss by reportable segments Millions of yen 2013 Industrial gas Electronics Energy Other Corporate/Eliminations Total Impairment loss ¥45 ¥— ¥— ¥4 ¥— ¥50
Millions of yen 2012 Industrial gas Electronics Energy Other Corporate/Eliminations Total Impairment loss ¥213 ¥— ¥— ¥— ¥— ¥213
Thousands of U.S. dollars 2013 Industrial gas Electronics Energy Other Corporate/Eliminations Total Impairment loss $478 $— $— $43 $— $532
(g) Information on amortization and unamortized balance of goodwill by reportable segments Millions of yen 2013 Industrial gas Electronics Energy Other Corporate/Eliminations Total Amortization ¥ 2,769 ¥— ¥223 ¥— ¥— ¥ 2,992 Unamortized balance 43,329 — 231 — — 43,561
Millions of yen 2012 Industrial gas Electronics Energy Other Corporate/Eliminations Total Amortization ¥ 2,735 ¥— ¥243 ¥— ¥— ¥ 2,979 Unamortized balance 39,383 — 351 — — 39,735
Thousands of U.S. dollars 2013 Industrial gas Electronics Energy Other Corporate/Eliminations Total Amortization $ 29,442 $— $2,371 $— $— $ 31,813 Unamortized balance 460,702 — 2,456 — — 463,169
Taiyo Nippon Sanso Corporation | Annual Report 2013 51 (h) Information on amortization and unamortized balance of negative goodwill which resulted from business combinations prior to April 1, 2010 by reportable segments Millions of yen 2013 Industrial gas Electronics Energy Other Corporate/Eliminations Total Amortization ¥215 ¥11 ¥25 ¥20 ¥— ¥273 Unamortized balance 54 22 10 19 — 106
Millions of yen 2012 Industrial gas Electronics Energy Other Corporate/Eliminations Total Amortization ¥371 ¥30 ¥25 ¥80 ¥— ¥507 Unamortized balance 226 34 35 39 — 335
Thousands of U.S. dollars 2013 Industrial gas Electronics Energy Other Corporate/Eliminations Total Amortization $2,286 $117 $266 $213 $— $2,903 Unamortized balance 574 234 106 202 — 1,127
24. Supplementary Cash Flow Information
Cash and cash equivalents in the consolidated statements consolidated balance sheets as of March 31, 2013 and of cash flows for the years ended March 31, 2013 and 2012 2012 as follows: were reconciled to cash and deposits reported in the Thousands of Millions of yen U.S. dollars 2013 2012 2013 Cash and deposits ¥24,743 ¥34,596 $263,083 Time deposits with maturities of more than three months (2,022) (1,321) (21,499) Cash and cash equivalents ¥22,721 ¥33,275 $241,584
The acquisition cost and net payments for assets and liabilities of RASIRC, Inc., acquired through a stock purchase, for the year ended March 31, 2013 were as follows: Thousands of Millions of yen U.S. dollars Current assets ¥ 141 $ 1,499 Noncurrent assets 616 6,550 Goodwill 713 7,581 Current liabilities (220) (2,339) Noncurrent liabilities (698) (7,422) Acquisition cost of assets (549) (5,837) Cash and cash equivalents 36 383 Purchase of investments in subsidiaries resulting in change in scope of consolidation ¥(513) $ (5,455)
52 Taiyo Nippon Sanso Corporation | Annual Report 2013 The acquisition cost and net payments for assets and liabilities of US Airweld, Inc., A&F Welding Supply, Inc., Whitmer Welding Supplies, Inc. and Evergreen Supply, Inc., acquired through an assets purchase by Matheson Tri-Gas, Inc., a consolidated subsidiary of the Company, for the year ended March 31, 2013 were as follows: Thousands of Millions of yen U.S. dollars Current assets ¥ 341 $ 3,626 Noncurrent assets 1,153 12,259 Goodwill 974 10,356 Current liabilities (51) (542) Acquisition cost of assets (2,417) (25,699) Cash and cash equivalents —— Payments for assets purchase ¥(2,417) $(25,699)
The acquisition cost and net payments for assets and liabilities of Leeden Limited, acquired through a stock purchase, for the year ended March 31, 2012 were as follows: Millions of yen Current assets ¥ 9,864 Noncurrent assets 5,941 Goodwill 591 Current liabilities (5,963) Noncurrent liabilities (1,860) Minority interests (2,217) Acquisition cost of assets (6,356) Cash and cash equivalents 1,163 Transferred shares 1,041 Purchase of investments in subsidiaries resulting in change in scope of consolidation ¥(4,151)
The acquisition cost and net payments for assets and liabilities of Quimby, acquired through an assets purchase by Matheson Tri-Gas, Inc., a consolidated subsidiary of the Company, for the year ended March 31, 2012 were as follows:
Millions of yen Current assets ¥ 221 Noncurrent assets 947 Current liabilities (154) Acquisition cost of assets (1,013) Cash and cash equivalents — Payments for assets purchase ¥(1,013)
The decrease in assets due to the transfer of the SDS and VAC businesses of Matheson Tri-Gas, Inc., a consolidated subsidiary of the Company, for the year ended March 31, 2012 was as follows:
Millions of yen Current assets ¥20 Noncurrent assets 3 Total assets ¥24
25. Subsequent Events
Appropriation of retained earnings The following appropriations of retained earnings, which have not been reflected in the accompanying consolidated financial statements for the year ended March 31, 2013, were approved at the shareholders’ meeting held on June 27, 2013. Thousands of Millions of yen U.S. dollars Cash dividends—¥6.00 ($0.064) per share ¥2,328 $24,753
Taiyo Nippon Sanso Corporation | Annual Report 2013 53 Report of Independent Auditors
54 Taiyo Nippon Sanso Corporation | Annual Report 2013 Investor Information
(At March 31, 2013)
Head Office: Toyo Building, 1-3-26, Koyama, Shinagawa-ku, Tokyo 142-8558, Japan
Number of Employees: 11,468
Date of Incorporation: October 1910
Number of Shares: Authorized—1,600,000,000 Issued—403,092,837
Minimum Trading Unit: 1,000 shares
Number of Stockholders: 15,768
Transfer Agent for Shares: Mizuho Trust & Banking Co., Ltd.
Major Stockholders:
Thousands of Percentage of Major Stockholders Shares Owned Total Mitsubishi Chemical Corporation 60,947 15.12% JFE Steel Corporation 25,254 6.27 Taiyo Nippon Sanso Client Shareholding Society 20,735 5.14 Meiji Yasuda Life Insurance Company 16,007 3.97 National Mutual Insurance Federation of Agricultural Cooperatives 15,194 3.77 Mizuho Corporate Bank, Ltd. 14,484 3.59 The Master Trust Bank of Japan, Ltd. (Trust Account) 11,799 2.93 Japan Trustee Services Bank, Ltd. (Trust Account) 11,212 2.78 The Norinchukin Bank 10,000 2.48 Dai-ichi Mutual Life Insurance Company 7,537 1.87 193,169 47.92%
Common Stock Price Range and Trading Volume: (Yen) (Thousand shares)
1,000 100,000
Common Stock Price Range 800 80,000
600 60,000
400 40,000
200 20,000 Trading Volume
0 0 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Fiscal year 2012 Fiscal year 2013
Taiyo Nippon Sanso Corporation | Annual Report 2013 55 Toyo Building, 1-3-26, Koyama, Shinagawa-ku, Tokyo 142-8558, Japan Tel: 81-3-5788-8000 www.tn-sanso.co.jp Printed in Japan